How To Sell Defence Equipment In Australia

Transcription

1 ABC Ltd International Expansion Strategy

2 Abstract This research report presents the findings of the research on the global defense industry for aaustralian contractor for providing services for defence equipments (ABC Ltd). It also tries to analyze the foreign markets which are most lucrative for ABC to enter. The major findings of the global industry analysis suggest more demand in the sector due to increasing defence expenditures and free trade policies around the world in defense industry. For ABC Ltd other locations where it can expand its business include India, Saudi Arabia and Singapore. These locations have shown utmost potential for defense equipments due to increased security measures and defense equipment requirements. The best bet currently for the ABC Ltd is to enter Saudi Arabia market due to comparatively friendly and less regulated market than India (most regulated market but with highest potential among the three countries) and lower competency and technological advancement than Singapore (freest market but with lowest potential among the three countries) 1

3 Table of Content Introduction... 3 Global Industry Structure... 3 Potentially Viable Markets for ABC Ltd... 6 Strategic Analysis and Recommendations... 8 Conclusion References

4 Introduction ABC Ltd is an organization in the Defence Industry of Australia. ABC limited is a contractor of defence equipments maintenance and repair. This means that some of the defence equipments owned by Royal Australian Navy (RAN), Australian Army, Royal Australian Air Force (RAAF) go to ABC Ltd for regular and timely maintenance or irregular maintenance which mostly consists of repairs. The defence equipments have a predefined period after which maintenance on the machines must be done. Thus the defence machines and equipments like naval ships, the helicopters and the artillery guns at their time of maintenance as per the instructions of Original Equipment Manufacturers (OEMs) are maintained by ABC Ltd. Also there are cases when some of the components of these machines fail. In these conditions also, the machines are repaired by the organization. The organization has required technical and engineering capabilities to do the activities involved in its business is one of the major players in the business of defence maintenance contractors. However the industry under which the organization falls is Defence Industry. Defence Industry is big industry in Australia and the major customers with in Australia for the organizations like ABC Ltd are RAN, RAAF, Army and other tri-service units. Global Industry Structure Global Defence Industry is a very big industry with current estimated expenditure of about $2 trillion by all the countries in the world for defence purposes. The defence industry includes manufacturing the defence equipments, servicing these equipments, preparing software and many other related activities. The country which is the largest contributor to the expenditure done by world on defence is USA. In 2011, the total global expenditure on defence was about $1.6 trillion out of which $711 billion was spent by USA alone. USA not only the largest customer but also the largest supplier in the defence industry as it is the largest exporter of defence related equipments and services to the world. The next largest player in this industry is China which has spent $143 billion on its defence. Like USA, China is also one of the biggest exporters as well as biggest importers of defence equipments and services. But it must be 3

5 realized that the expenditures done by these countries are the figures of only for business related to defence equipments and services but also include the other expenditures like paying salary to the armed forces and other non equipment purchase expenditures. (Deloitte Global Services Limited, 2012) If we look at the defence industry from only the purchase and sale of defence equipments and services perspective, we find that the largest exporter in the world is USA which exported equipments and services worth about $8.6 billion to the world in The next largest exporter is Russia which exported equipments and services worth about $6.0 billion to the world in the same year. The other major exporters of defence equipments and services are Germany, France, UK, China and Sweden. On the other hand the major importer of these things is India which bought such defence systems and services worth $3.3 billion in The next largest importer is Saudi Arabia which imported defence systems and services worth $2.6 billion in The other major importers of the world include Australia, South Korea and Singapore (SIPRI, 2011). Thus it can be seen that in this industry the major exporters are mostly the developed countries belonging to the western hemisphere while the major importers are generally the developing countries from eastern hemisphere of the globe. It can be seen on analyzing the industry that the current trend suggests that there is an increasing demand from the developing world for defence equipments and services. This is because the developing countries are seeing a high growth period currently which means that there are high revenues available with the governments of these countries to spend on their defence needs. For example countries like India, South Korea and China are having GDP growth rate more than 6% for the past decade which leaves more money in the hands of government to buy the defence equipments and services. The other major factor which contributes to this current trend is that the political situation and the relations between countries in Asia are not very good because of which 4

6 the countries are feeling more need to strengthen their defence. For example the relation of India with China and Pakistan are tense and thus the Indian government is trying to make its defence stronger in case there is any hostile attempt against India by these countries. Also South Korea has tense relationship with North Korea and China. Similarly Saudi Arabia perceives security threats in volatile Arabian Peninsula which makes these countries to import more defence equipments and services. (Guay, 2007) On the other hand, the major exporters are able to export more defence products and services because they have a developed infrastructure available with them to produce more defence equipments and provide defence services like maintenance and repairs. The other major thing which is the reason behind them being major exporters is that these countries invest a lot of money in R&D which keep them technologically ahead from other countries and can bring new and latest defence products in the market which is not being done by developing countries like India and South Korea. If we look at China, we see an interesting trend in the way the defence industry is evolving in the country. From year 2000 to 2006, China used to be the larger importer of the defence products and services with import of more than $3 billion per year during most of this period. In 2006, the imports were $3.8 billion. But at the same time China was also spending money in developing infrastructure and technological competence to be able to make the defence products and provide defence services indigenously and able to export them (SIPRI, 2010). This reduced the reliance of China on imports for meeting its defence needs.in 2010, the imports of China reduced to only $0.5 billion and its exports increased to $1.4 billion. This means the country is now a net exporter rather than being a net importer which it used to be a few years ago. This general trend where the developing countrieswith emerging economies are going to be major importers and technological advanced countries are going to be major exporters seems to 5

7 be continuing in the next decade as well because the other developing countries are not investing heavily in building domestic capacity to meet their defence needs like China. Thus western countries like US, Russia and other European countries will likely be major exporters in coming years as well and the countries like India, Saudi Arabia, South Korea will continue to import more defence products and services because the political situation is tense in these countries and the countries also are growing at high rate which means more funds available to buy defence products and services. In fact currently every defence equipment manufacturer and service provider in the world is trying to grab a pie of this large market available. This makes countries like India, Saudi Arabia and Australia lucrative markets for organizations similar to ABC Ltd which provide defence services like maintenance and repairs of the defence systems. (IBM Institute for Business Value, 2008) Potentially Viable Markets for ABC Ltd India As mentioned above India is currently the largest defence systems and services importer of the world. The country spends about 2.4% of its GDP on its defence expenditures. In recent years the country has done many multibillion deals with countries like Russia, France, USA and Israel. But the country needs some quality and reliable service provider for its defence systems and equipments. This because the country has a large number of tanks, helicopters and naval ships which are not very well maintained because of which there have been many cases of its fighter planes getting crashed. Currently the defence systems of Navy, Air Force and Army are serviced by the army technicians but because of resource crunch and lack of technological competence the defence machines are not getting maintained and repaired regularly and properly as per the instructions of OEMs (Kane, 2009). And the situation is not going to improve unless some quality and reliable organizations are found by the Indian governments and given the task to do this service on contract basis. Since the imports of defence systems and services are going to increase in coming future due to the rapidly increasing GDP and tense relations with Pakistan and China, the Indian defence 6

8 servicemarket will prove to be very profitable for the interested organizations if they can enter the Indian market now. Saudi Arabia The country is the second largest importer of defence equipments and services in the world. In 2010, the country spent 10% of its GDP on its defence needs which is the highest in the world. The country is the richest in Arabian Peninsula and has tense relationship with Iran which makes the country to always work towards making its defence stronger. Saudi Arabia also had been doing very large defence deals with US and European countries and buying defence equipments with them(deloitte Global Services Limited, 2012). As the country doesn t have the know-how of maintaining and repairing these defence equipments, it also has to buy these services from the OEMs whocharge, Saudi Arabia a higher price for exclusivity of their service. This means the defence services are also imported from US and European countries. The defence market of the Saudi Arabia thus needs some quality and reliable service providers who can provide the same service as OEMs at lower rate. This will reduce Saudi Arabia s dependence on OEMs for everything from life to death of the defence equipment. Since the country has so many defence equipments due to its huge imports which need quality service the political situation in Arabian Peninsula doesn t seem to be moving towards any solution, the defence imports of Saudi Arabia will only be high in future which makes this market highly lucrative for organizations who can provide maintenance and repair service for its defence equipments. Singapore Singapore is the fourth largest defence importer of the world. The country s defence imports have been more than $1 billion in last three years and are going to be high in the recent future. The country like Saudi Arabia imports most of its defence equipments form US and France. The country is importing these equipments due to tense relationship with China over territorial disputes in South China Sea and the recent plan of the government to modernize its defence infrastructure. The country also is not having high technological competency in 7

9 maintenance and repair of its defence equipments and has to depend on the OEMs from USA and France mainly to maintain and repair these equipments(sipri, 2011). There is a big space vacant for defence service providers in the county who can provide service to its increasing number of its new defence hardware. Organizations that can do this service on contract basis for government and can provide quality service will reduce the country s reliance on OEMs. With rising power of China, the neighboring countries like Singapore are going to make their defence stronger and modern; which means more imports of defence equipments and higher opportunity for defence service providers to provide maintenance and repair service to their defence systems. Strategic Analysis and Recommendations Based on the analysis done above on the defence industry and its current trend, we found that market of India, Saudi Arabia and Singapore hold maximum potential for growth in this sector in coming years. In order to select one market which is the best bet for ABC Ltd for expansion in abroad, it is important to understand the market conditions (political, economic, social, technological and legal) in these countries. India India as stated previously is the largest importer of defence equipments and thus has the largest need for properly maintaining and repairing its new defence equipments. But if the political and legal conditions are observed, one can realize that the defence market in India is highly regulated where most of the operations are done by government owned entities. For example, for preliminary maintenance and repair of its defence equipments, military technicians are used and higher level of service is done by PSUs (Public Sector Units) and it is difficult to win a deal by private and foreign organization like ABC Ltd for providing service for the defence equipments in India (Delloite and CII, 2010). The economic outlook is however quite bright with economy doing very well even in troubled global economy. Thus the defence imports and country s need 8

10 for their maintenance service is only going to increase. Technologically, on the other hand the country is not having very high competency in this sector which means that the defence equipments don t as get good service as is recommended by the OEMs. Saudi Arabia Saudi Arabia the second largest importer of defence equipment also holds a lot of potential for organizations who are into providing the services for defence equipments. Politically and legally the country is a monarchy ruled by its King but the country follows Islamic Laws and constitution. The country imports a lot of products and services with low import duties which mean ABC can provide services at low cost in this country. But the organization must also note that market is very complex with most of the deals being initiated and given based on the government tenders (CAAR and AACCI, 2008). Thus ABC will have approach government for its proposal through tenders initiated by Saudi government. Economically the county is the largest in the Gulf region and had good growth rate for past few years which means it has of money which it can spend to make its defence stronger under the conditions oftense relations between various countries in the country like Iran and Israel. Technologically the country is not as advanced as other western countries; which makes the country to do deals with the OEMs of defence equipments to provide service as well for the imported equipments. Singapore Singapore is also among the top importers of defence equipments and is going to be one of them for next few years and thus there is huge need for services related to maintenance and repair of these equipments. Politically and legally the country is one of the freest markets in Asia and it is easiest for the foreign and private organizations like ABC Ltd to enter in the market and provide its services. But the free market also means more competition from other foreign players. Economic outlook of the country is good and the country is growing at good rate and which is the reason for its high expenditure on defence. But italso suggests that the high imports of defence equipments will not be going on for long as this is the phase when the country is 9

11 modernizing its defence and with smaller GDP in absolute terms, it will be difficult to sustain so much expenditure on defence each year (SIPRI, 2011) Few years later the country will not be importing the defence equipments in such large quantity and then the market will become unprofitable for the organization. Also the country is technologically more advanced than India and Saudi Arabia and thus the country has more potential to do the service operations domestically after few years of experience from OEMs. Recommendations Looking at the global defense industry scenario, it is recommended that ABC Ltd should enter Saudi Arabia first. This is because the prospects of ABC getting a foothold in Saudi Arabia are best as compared to India and Singapore. The Saudi market conditions are favorable for such a foreign defense industry player such as ABC as the market is not highly regulated and is bound to grow in future. The approach of the ABC to enter Saudi defense market is to keep a close watch over the defense deals which the Saudi government is planning. Then it must approach the government for the maintenance and service of the equipment s through tenders released by the government. ABC should adopt a price based strategy to enter and capture the market share of defense equipment maintenance. This is because currently the OEMs only provide this service with the purchase of equipment and charge higher due to exclusivity and lack of competence with in Saudi Arabia for this service. If ABC can quote lower price for the equipment service and maintenance to the government, then ABC can enter Saudi Arabia market easily. Conclusion In conclusion, looking at the market conditions (political, economic, social, technological and legal) in India, Singapore and Saudi Arabia, it can be recommended to ABC Ltd to enter Saudi Arabia. The country provides most conducive market conditions where the organization can start its operations at present. It must also keep eye on developments happening in Indian defence market conditions and must enter it when the defence market in India becomes freer and easier to enter and operate from. The organization must enter Singapore only if it has an exit plan also ready because at present the defence market is lucrative but may not be as lucrative after next few years. 10

12 References CAAR and AACCI 2008, Business Guides to the Arab Gulf: The Kingdom of Saudi Arabia,Bayliss Associates Pty Limited Delloite and CII 2010, Prospects for Global Defence Export Industry in Indian Defence Market, Deloitte Touche Tohmatsu India Private Limited Deloitte Global Services Limited 2012, Global aerospace and defense industry outlook: A tale of two industries2012, Deloitte, United States Guay, T 2007, Globalization and its Implications for the Defense Industrial Base Strategic, Research Studies Institute IBM Institute for Business Value 2008, Going global in Aerospace and Defense, IBM Corporation, United States Kane, R 2009, National Governments and Their Defence Industrial Bases: A Comparative Assessment of Selected Countries, Canadian Association of Defence and Securities Industries (CADSI) SIPRI 2010, SIPRI Yearbook 2010: Armaments, Disarmament and International Security, Sweden. SIPRI 2011, SIPRI Yearbook 2011: Armaments, Disarmament and International Security, Sweden Words: 3,135 11