July 20, 2007

China’s defence industry on cusp of major modernisation

China is on the cusp of opening up a potentially enormous new market for defence equipment and investment following an unprecedented effort to modernise its defence forces and increase defence spending.
In a paper recently presented to leading city analysts by Matthew Smith, Jane’s Defence Economics Analyst, Matthew says that China’s defence spending has more than doubled since 2001 and is likely to more than treble by 2010 to USD59 billion.

“China stands on the brink of opening up huge opportunities for the defence industry due to a combination of increased defence spending and an expanding liberalisation of its domestic defence industry, particularly in the aerospace sector,” says Smith.

“New reforms introduced over the last five years, designed to improve the quality and timeliness of indigenous defence equipment, means increased competition, outsourcing of activities and encouraging foreign investment in non-strategic defence industries.”

Jane’s reports that China’s unofficial defence spending is thought to be considerably higher in areas such as strategic weapons and imported weapon systems (predominately from Russia), with future expenditure likely to be heavily influenced by its efforts to modernise.

“Expenditure will be focused on the procurement of advanced, high-technology defence equipment, funding increased professionalism and financing the consequent need for improved military training and benefits,” adds Smith.

“The key task for the defence industry in accessing this new defence market will be to establish the industries where investment is likely to be the largest and the areas in which China is most likely to open spending to foreign companies.”

Jane’s reports that while these trends of increased defence spending, market liberalisation and surprisingly flexible export regulations have the potential to open up a huge new market, the European defence industry must consider carefully how best to access this potentially lucrative opportunity.

“The major concern for companies looking to enter this market is to do so while protecting their investments and intellectual property. As well, they must very carefully consider the potential strategic impact of the technologies that they are exporting," says Smith.

'Future Trends in Chinese Defence Spending' was the topic of a paper presented by Jane's Defence Economics analyst Mathew Smith to the Berwin Leighton Defence Breakfast in the City of London on 12 July. Smith outlined the growing space for private companies in the Chinese defence market in addition to the status and prospects of the current EU arms embargo. (ENDS)

Editor’s notes: To speak to Matthew Smith, Jane’s Defence Economics Analyst, or for a full copy of the article as it will appear in next month’s edition of Jane’s Defence Industry, please contact Leah Turner, Press and PR Officer, on +44 (0) 208 700 3922 or email leah.turner@janes.com

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