Global Naval Vessels & Surface Combatants
1. Market Overview:
The naval vessels and surface combatants market is a subsector of military transportation and
armaments industry. Operations under this segment include construction and conversion of naval ships
broadly classified under the following classes –
• Aircraft carriers
• Large Surface Combatants
- Amphibious Assault ships
• Small Surface Combatants
- Littoral zone ships
• Patrol boats
• Support ships
Operations are generally undertaken on a project level basis which is managed by a principal defence
contractor appointed by the country’s government. The project is broken down into activities which are
then sublet by the principal contractor to other contractors & suppliers through either partnerships or
alliances. Shipbuilding costs incurred unevenly during the project timeline are spread across over the
years by the contractors.
The sector commands large scale working capital requirements and is characterized by very low
competition, high barriers to entry and extensive manufacturing lead time running into more than 5 years
on an average or longer, largely depending on the magnitude of operations. Demand has been highly
volatile and uncertain with regards to periodicity and mostly driven by changes in a nation’s political
environment, frequency of national security threats & safeguarding concerns like terrorism, hijacking,
criminal infiltration or maritime piracy, natural disaster rescue operations as well as the government’s
ability to meet long term defence budgetary requirements. Supply is purely hinged upon the availability of
iron & steel, construction tools & equipment, skilled manpower, project financing and technology &
communications equipment required to produce the combat vessels and the contractor’s ability to deliver
the vessel within the projected budget and timeline. Since the sector is highly capital intensive, only a few
contracting companies meeting the requirements are provided manufacturing licenses by the regulators
and hence the market model functions in an oligopoly setup throughout its business life cycle.
The global market size of the naval vessels and surface combatants industry has grown from US$ 552.72
billion from 2006 to US$ 584.17 billion as of year-end 2015 at a CAGR of 0.62%, and is forecasted to rise
at a CAGR of 1.97% from US $ 587.74 bn at end of this year onwards till US $ 714.09 bn in year 2026.
The global military expenditure for year 2015 was US $ 1760 billion, a 0.8% increase over the previous
year mark of US$ 1746 billion. There has been increasing demand for frigates and destroyers given the
prevailing hostilities & uncertainty in the world political environment caused by the global militarization of
nations, political/religious extremism and anti-government rebellions, especially in the Middle-East. The
global naval vessels & surface combatants market is presently dominated by publicly listed companies
which frequently contract with governments of nations that manifest high GDP levels, have economically
stable environments and which represent a significant portion of the global defence expenditure.
Following are the top 5 naval vessels and surface combatants manufacturers by revenue –
Hyundai Heavy Industries (HHI) is the world’s biggest navy shipbuilder with annual revenues of US$
39.33 billion in 2015 and a 15% global market share. Mitsubishi Heavy Industries is the second largest
with 2015 annual revenues of US$ 39.10 billion, followed by Daewoo Shipbuilding & Marine Engineering
(DSME) with annual revenues of US$ 12.76 billion, Samsung Heavy Industries (US$ 8.58 billion), and
Huntington Ingalls Industries Inc (US$ 7.02 billion).
The top 10 countries with highest military spending in the world include United States (33.5%), China
(12.09%), Russia (5.14%), Saudi Arabia (4.81%), France (3.43%), United Kingdom (3.37%), India
(2.88%), Germany (2.65%), Japan (2.61%) and South Korea (2.18%). Most of these 10 countries are also
leading world producers of iron & steel, required to produce the naval vessels. According to World Steel
Association, the aforementioned countries constitute approximately 87% of the world’s total iron output
and 80.82% of the world’s total crude steel output, thus affirming their shipbuilding capabilities.
Considering the resourcefulness, existing naval capabilities and the likely implementation of future naval
defence programs put in place by these economically powerful regions, 5 of these countries comprising of
the United States, United Kingdom, Russia, India and China are primed to boast of the largest fleets of
naval ships by the year 2030.
2. Trends in the industry:
2.1 North America
2.2.1 United States – King of the Ring
As per a latest report on Military expenditure by SIPRI, the North American continent accounted for
34.82% of the global defence spending in 2015. United States managed a spending of $ 595.47 billion in
year 2015, which accounted for 33.83% of the global expenditure thus making it the largest spender on
military transportation and armaments in the world even though it fell short of the 2014 figures by 2.37 %.
Naval vessels manufacturing operations in the US are mostly contracted to Huntington Ingalls Industries
Inc, a subsidiary of Northrop Grumman and Bath Iron Works, a division of General Dynamics Inc.
Huntington Ingalls with annual revenues of close to $7 billion in 2015 is the largest military shipbuilding
player in the sector with a market share of more than 70% in the US naval surface combatants market.
The defence constructor primarily serves as the U.S Navy’s only aircraft carrier supplier (CVN-78) and
constructor of amphibious assault and expeditionary warfare ships for the U.S. Navy, including LHAs and
LPDs. Most recently, Bank of Montreal, has purchased a stake of 1.92% in Huntington Ingalls, Inc.
United States is currently ranking first in terms of possessing the largest combat fleet of ships with a battle
force of 272 ships of which 233 are active in commission. Current composition of the fleet includes 10
Aircraft Carriers, 84 Large Surface Combatants, 18 Small Surface Combatants and Mine Counter-
measure Vehicles (MCMV) and 30 Amphibious Ships, 5 Combat Logistics and Support Ships. These
include at least 34 littoral combat ships (LCS) and 3 Zumwalt (DDG-1000) class destroyers worth US$ 4
billion currently being constructed for the U.S. Navy, having a displacement capacity of more than 15,000
tons. The US is planning to extend its fleet up to 308 combat vessels fuelling US$ 81.36 billion of
construction by the year 2021 under its Future Years Defence Program, as stated by the Shipbuilders
Council of America website. These would include 10 destroyers, 4 frigates 3 amphibians, 1 aircraft carrier
and 3 LCS worth US$ 40.97 billion.
Considering into perspective, the nation’s global presence as a military power, its scale of military
operations in the Middle-East and the ability to deter China’s military expanse in the Indo-Pacific region, in
Sept 2016, the US government published a 30 year plan Navy Shipbuilding plan beginning from 2017,
including procurement of 6 aircraft carriers, 23 assault ships and 124 surface combatants for which it has
laid out an average estimated cost spread of $ 16.9 billion over the next 10 years till 2026. In effect to the
same, the US government has already signed a contract worth US$ 273 million with Huntington Ingalls in
July this year for the procurement of LHA-8 amphibious assault ships and another US$ 120 million signed
in Oct 2016 for the ship’s modification. In Dec 2015, the US government awarded a $93.1 million
technology contract to defence contractor Northrop Grumman under Defense Advanced Research
Projects Agency (DARPA)'s Tactically Exploited Reconnaissance Node (TERN) program, for providing
flight and landing support to assault drones and other surveillance aircraft to take flight from smaller ships
(LCS and frigates), thus virtually converting every ship in the battle force into an aircraft carrier. With
presidential elections around the corner, the Navy is set for newer and further expansion plans, once the
new budget is declared.
2.2.2 Canada – A Snail at the Seashore
North American neighbor and trading partner, Canada is currently still in the planning phase to build a
new fleet to replace the navy’s current set of outdated ships. As per an initial proposal put forward under
the National Shipbuilding Procurement Strategy (NSPS) in 2010, the Canadian government had locked in
US $ 21.5 billion in an agreement with Irving Shipyard as the principal contractor for the construction of 15
modern warships at its Halifax shipyard which at the time, were set to replace the Royal Canadian Navy’s
worn out ships including 3 destroyers and 12 frigates. In 2011, a deal was reached with Seaspan
Shipyard to build non-combat ships for the Canadian Coast Guard and Royal Canadian Navy including 3
Offshore Fisheries Science Vessels (OFSV), 1 Offshore Oceanographic Science Vessel (OOSV), 2 Joint
Support Ships (JSS), 1 Polar Icebreaker (PI), and a maximum of 5 Medium Endurance Multi-Tasked
Vessels (MEMTV), and 5 Offshore Patrol Vessels (OPV). However cost underestimations by contracted
parties, increasing inflation, rising US dollar and resulting exchange rate risks ensured non-construction of
naval vessels since 2009, which called in for project reviews by Canadian legislators to gather realistic
and accountable project estimations. This has forced the Canadian Navy to continue to rely on its older
fleet of ships, which on an average are more than 20 years old and have constantly required breakdown
maintenance, frequent engine repairs and overhauling, thus adding up costs and delaying other projects
well behind schedule. Hence, Canada’s policy makers are discouraged to rake up further expenditure on
producing naval vessels. As a result, Canada has witnessed a decrease in its overall military expenditure
since 2011. Spending numbers for year 2015 further fell by 3.61% from its 2014 figures of US $ 17.21
billion, keeping shipbuilding investors at bay, until a revival plan is put in place to turns things around.
Current ship battle force includes 1 destroyer, 12 maritime coastal defence vessels, 12 patrol frigates, and
8 Orca class defence vessels.
Irrespective of the detrimental factors, Irving Shipyard has announced the first newly constructed naval
ship since 2009 to be released into waters in 2018.
2.2.2 “Ghost” Ship – An Innovative Warfare Startup
In August 2014, Juliet Marine Systems LLC, a private business venture founded by its CEO Gregory
Sancoff in New Hampshire, USA, had announced the launch of an innovative combat vessel called
“Ghost”. The key unique feature of this watercraft is that it has supporting wing-like struts of upto 12 feet
on each side using suction cavitations technology to propel the boat’s gliding movement above the
surface of the water as well as underwater. When the struts compress inwards, it aids the main structure
of the boat to suspend mid-air, thus avoiding the effect of the waves. Purposefully built as a stealth boat
to serve covert missions as well as search & rescue operations, the “Ghost” is well equipped with
automatic fire and missile systems, jet propulsion & fuel systems, computer systems and can
accommodate up to 18 personnel onboard. The “Ghost” is configured in both manned and unmanned
versions of the watercraft and can traverse through disputed waters or littoral zones such as Gulf of Aden
or South China Sea without getting detected on radar systems providing it the ability to operate behind
enemy lines. The CEO highlighted that the vessel’s smooth movement, minimal noise emissions and
being untraceable under enemy radars could be some key potential selling points for the “Ghost” to be
inducted into the US Navy. Although the US Navy has only proposed interest, Juliet Marine Systems has
already obtained official approval from the US government in Dec 2015 to showcase this technology to
South Korea, a key ally of the United States and is working with Karmel Technologies Inc. to this effect.
2.3 Asia Pacific Region
Apart from USA, Asia Pacific continues to be the focal point of attention as countries in the Asian region
have witnessed aggressive military activity in the seas in the last 3 years. The Asia Pacific region saw an
increase of 5.38% in military spending in 2015 over previous year figures of US$ 427 billion. Primarily,
China’s aggressive naval militarization, the naval conflict in East and South China seas, North Korea’s
ballistic missile launch, South Korea’s shipbuilding woes, the political instability and refugee crisis in the
Middle East and rising threat of maritime piracy in the Indian Ocean act as key driving factors for this
growth, thus emphasizing the Asian region’s commitment to invest in construction of stronger naval
systems and supporting infrastructure. This has attracted defence contractors across the world to take
advantage of the political games being played out in the Asian seas.
2.3.1 China – Naval Star of the East
In recent years, it is China’s political aspirations that have caught the eye of the international community.
Unlike in earlier times when China was solely dependent on the Soviet Union and post-Soviet Russia,
the country has been leveraging technology and cheap working class labour to build its own
ships and boost its naval support systems. Most recently, it has been testing the use of cruise and ballistic
missiles from ships and submarines that can neutralize targets anywhere in the world. As of 2016,
China’s current fleet of naval vessels includes 236 ships including 1 aircraft carrier, 52 frigates, 23
destroyers, 23 corvettes, 86 missile-armed coastal patrol craft and 52 amphibious assault ships.
The PLA navy has put into service Type-71 Yuzhao class of amphibious assault ships capable of
transporting other ships and combat vehicles and is currently produced by China Shipbuilding Industrial
Corp (CSIC). The Type-71 has a standard displacement capacity of 18,500 tons, in comparison with the
U.S. Navy’s Whidbey Island/Harpers Ferry (LSD-41/49) full load displacement of 15,900-16,700 tons. On
an average, US made LHD/LHA-type assault ships would displace anywhere between 41,000 to 45,000
tons which however is lesser, than China’s assault ships with a displacement of 50000 tons. A large
number of China’s Type 055 destroyer’s 10000 tons have an average displacement of 9000 – 9500 tons
in comparison to US destroyers’ figures of approximately 8,315 – 9,200 tons, thus surpassing US
benchmarks. Moreover, China has currently projected a fleet of 351 ships by the year 2020, beating US
battle force estimations, which would include the following being commissioned in the next 2 years – 38
frigates (by this year) and 78 destroyers, thereby seeking to emerge as a rapidly growing naval force.
Presently, the Chinese are concentrating on building amphibious assault ships and destroyers including
LUYANG III, a newly built class of Chinese destroyers by DSIC, which is scheduled to run active in
service this year.
The primary military shipbuilding contractors in China include China State Shipbuilding Corp (CSSC),
China Shipbuilding Industrial Corp (CSIC), and its subsidiary Dalian Shipbuilding Industry Co (DSIC), the
latter being the largest navy shipbuilder in China. These contractors in the military shipbuilding market
have resorted to large volumes of securitization in the decade upto 2015, itself. CSSC and CSIC
conducted 31 transactions and pulled in an aggregate capital total of US$ 22.26 billion from equities (US$
6.59 billion) and bonds (US$ 15.67 billion) since 2004-2015, which is 20% more than that of total
combined figures for Huntington Ingalls, General Dynamics, and Lockheed Martin. In Oct 2016, CSIC
listed another US$ 587 million worth of shares to maintain a healthy cash flow, repay its debt and reduce
interest payments. In June 2016, DSIC was merged with Shanhaiguan Shipbuilding Industry (SSIC) and
is set to for further consolidation with other companies namely, Tianjin Xingang Shipbuilding Heavy
Industry Co (TXSHIC); Bohai Shipbuilding Heavy Industry Co (BSHIC) and Qingdao Beihai Shipbuilding
Heavy Industry Co (QBSHIC) and Qingdao Wuchuan Heavy Industry Co (QWHIC). A consolidation of
these firms is expected to put up an asset valuation of US$ 22.9 billion which would help create
synergies, thereby reducing the costs for the merged company.
2.3.2 East China Sea – A Battle of the Snake and the Mongoose
Particularly 3 countries in East Asia namely China, Japan and South Korea are keenly focused on
bolstering their naval capabilities in a bid to protect respective territorial interests in the East China Sea.
While the Chinese government has laid its claim on the Diaoyu islands (also known as in Senkaku in
Japanese) in 2012 by including the islands within its commercial air traffic borders (Air Defence
Identification Zone) and securing the sea bed area with mines, Japanese law enforcement agencies have
presumed the move to be a part of China’s political expansion, potentially threatening Japanese
sovereignty over the islands. Based on the Treaty of Mutual Cooperation and Security between United
States and Japan signed in 1952, in case a defensive military move is triggered to protect these islands, it
would potentially bring United States alongside Japan to war with China. On similar lines, China is also
currently engaged in a dispute with Japan and South Korea over Socotra Rock reef wherein each party
claims the reef area to be a part of their respective Exclusive Economic Zones (EEZ). Japan and Korea is
trying to counter China’s military intervention by conducting joint naval exercises along with the United
States and increasing investments on naval ships.
China’s assertiveness of its territorial defense of Senkaku (Diaoyu in Chinese) Islands in the East China
Sea has created a rift in Sino-Japan trade relations. Lately, the Chinese have also laid a claim onto the
Okinawa Prefecture and the Ryukyu islands which is a strategic US air base shared with Japan with by
constantly sending in cannon armed patrol boats and planes violating Japanese airspace.
Japan’s Maritime Self-Defense Forces (JMSDF), under a Mutual Defence Assistance (MDA) agreement
with the United States had developed a littoral combat ship in March 2014, known as the Future Trimaran
Combatant (FTC) which would act as a deterrent to the Chinese PLA Navy’s Type 056 corvettes and
Type 022 fast-attack boats in the shallow waters of the East China Sea. Being a lighter version of its US
cousin, the combat ship is well equipped with guns and anti-ship missiles and can accommodate SH-60K
anti-submarine helicopters and MCH-101 airborne mine countermeasures (AMCM) helicopters in order to
counter China’s underwater presence in the region. In view of the threat posed by the underwater mines,
the JMSDF has also tied up with Tokyo-based shipyard Japan Maritime United Corporation for its supply
of Awaji minesweepers and Mine Counter-Measure Vehicles (MCMV) in Oct 2015. In order to match
China’s expenditure growth of 9% in 2014, Japan too has increased military spending in 2015 by 1.01%.
Japan has also put in effect an “Anti-Access/Area-Denial” (A2/AD) strategy by lining up naval ships with
missile batteries across the disputed waters. This involves a strategic partnership contract worth US$490
million with Lockheed Martin to fit Aegis SPY-1 radar and Aegis MK 41 missile defense systems into
Japanese Kongo-class and Atago-class destroyers and three South Korea KDX-III destroyers. Japan’s
present set of Akizuki-class destroyers Suzutsuki and Fuyusuki are constructed by the Nagasaki Shipyard
of Mitsubishi Heavy Industries and Mitsui Engineering & Shipbuilding respectively. Japan possesses 26
active destroyers in service and is only second to the United States (52) in terms of possessing the
highest number of destroyers in the world.
2.3.3 North Korea Ballistic missile Threat
Inspite of a UN ban imposed on North Korea from conducting nuclear tests, the country’s military
successfully launched a nuclear ballistic missile from a submarine in Sinpo that plunged into Japan's air
defense identification zone (ADIZ), a move is considered as a veiled threat to its military rivals - South
Korea, Japan, and the United States. To mitigate the threat arising from North Korea’s newly found
nuclear capabilities, the Japanese (JMSDF) has signed a procurement contract with Lockheed Martin to
supply 2 of its Aegis destroyers with supportive anti-missile defense systems by year 2020 each costing a
whopping US $ 1.5 billion. South Korea on the other hand is heavily reliant on the technological supplies
from the United States such as the procurement of an Arleigh Burke-class destroyer from Huntington
Ingalls or an Aegis destroyer from Lockheed Martin to counter the same.
2.3.4 South Korea – Harboring Economic Woes
South Korea has increased its military expenditure from US$ 37.29 billion in 2014 to US$ 38.64 billion in
2015. While Japan is committed to resistance against security threats, the shipbuilding market in South
Korea is currently in a financial crisis of sorts as 3 of its biggest shipbuilding firms – Daewoo Shipbuilding
& Marine Engineering (DSME), Hyundai Heavy Industries (HHI) and Samsung Heavy have reported
annual losses of US$ 3.8 billion, USD1.14 billion, USD 998 million respectively at the end of Dec 2015.
The losses can be attributed to a host of factors namely, global fall in oil prices, lack of new orders,
decrease in international trade & shipping volumes, appreciating US dollar and rising domestic prices of
raw materials particularly iron & steel, which have directly affected production of new vessels. Last year,
South Korea experienced considerable decrease in crude steel supplies. As per a World Steel
Association report, crude steel production in South Korea fell by 2.41% in 2015. While steel producers
resorted to exporting iron & steel at a cheaper rate than the local price, critical sectors within the country
including local shipbuilding industry were affected by the resulting rise in domestic prices. Also,
considering the fact that China’s shipbuilders offer cheaper solutions which poses a stiff challenge, South
Korean players are making their hay either by taking up more smaller projects requiring lesser cost
outlays such as patrol boats & tankers or being solely focusing on non-core operations for a temporary
DSME, in particular, had faced unreported losses in 2013 and 2014, which went unnoticed due to
accounting fallacies, until in 2015, wherein the company was advised to write-off its 2013 and 2014 profits
worth US$ 1.3 billion. Owing to the same, Korea Development Bank (KDB) has refused to issue bailout
plans for DSME, after the bank realized the defence contractor’s order performance to be just US$6.2
billion, a 26% decrease from its earlier order performance figures of US$ 10.8 billion. Because of these,
South Korea has been relying on import of ships from its ally, the USA. Lately, DSME has opened a
research and development center in Seoul focusing on research & insights on warships. In a pursing
effort to raise more funds DSME has announced the spin-off of its naval vessels business into a publicly
listed company, whose IPO is set to begin before the end of this year. In July 2016, Hyundai Heavy
Industries, surpassed DSME to win a bid contract for US $ 349 million to build an ice-capable navy tanker
supported by 2 Mini Typhoon cannons and an anti-ship missile Phalanx Close-in Weapon System (CIWS)
for the Royal New Zealand Navy.
2.3.5 South China Sea – A Triple Threat (China, South East Asia & Australia)
China is also currently implementing a land reclamation programme in the South China Sea wherein it is
dredging sand from the sea ground in waters surrounding the disputed islands of the Paracels, Pratas,
Scarborough Shoal and the Spratly Islands for the purpose of creating large floating man-made islands as
naval bases for its aircraft carriers and warships. The country’s maritime neighbours comprising of
Vietnam, Brunei, Malaysia, Indonesia, Australia and the Philippines have consistently laid claims to the
islands under dispute and opposed the repeated violations of maritime borders by fishing boats and naval
ships from China. The move considered by China as a part of their military modernization plans has
drawn sharp criticism from the international community particularly the Australian government which
believes it to be a strategic ploy to control the flow of international trade in South China Sea.
As part of Malaysia’s future defense strategy, MISC Berhad, a domestic shipbuilder has delivered the
Naval Auxiliary Vessel BUNGA MAS LIMA (BM5) to the Royal Malaysian Navy (RMN), to protect
Malaysian waters. Additionally, DSME was recently awarded an order to build 6 corvette battleships for
the Malaysian government, thus participating in the country's naval modernization project with special
attention for patrolling coastal areas in the South China Sea. The Philippines Navy has received 2 newly
built frigates by Hyundai Heavy Industries for US$ 337 million in this regard.
Its neighbour, Indonesia faces the problem of illegal intrusion including the eminent threat of China’s
assertiveness and the illegal poaching of fishing areas by foreign fishing parties, especially from Vietnam.
To mitigate the risk emerging from this threat, Indonesia possesses 6 Dutch-built Ahmed Yani/Van Speijk-
class light frigates, 10 corvettes of three classes including 4 Dutch built sigma class, 3 British-built patrol
and 3 outdated patrol corvettes, and 16 East German origin Kapitan Patimura/Parchim-class light
corvettes. With only 2 capable frigates and 6 corvettes, the rest of the fleet is obsolete and requires
replacement for which the Indonesian government needs to infuse funds. There is a dearth of state-
owned funds & the cost of warships is also high, thus necessitating the replacement of oldest ships first.
Along with piracy, Vietnam also faces the risk of China’s assertiveness in the South China Sea waters. In
Oct 2016, Vietnam received 2 Anti-Submarine Gepard-class frigates well equipped with anti-ship and anti-
aircraft guns and missile systems in this year constructed by Russia’s Zelenodolsk Shipyard, as a
measure to reduce potential Chinese incursion in Vietnam’s territorial waters.
Australia for its part is shoring up funds worth $40 billion for the purpose of investing in 12 Offshore Patrol
Vessels, 9 frigates and up to 21 Pacific Patrol Boats, the construction of which would start from 2018
onwards. For the Offshore Patrol Vessels project which is worth $3 billion, the government has invited
designs from Damen Schelde Naval Shipbuilding of Netherlands, Germany’s Fassmer, as well as
Lurssen. For the Future Frigates Program which is estimated to be worth $35 billion, 3 designers
including BAE Systems (Type 26 Frigate); Fincantieri (FREMM Frigate), and Navantia (F100 Frigate) –
have been short-listed for study and evaluation of their designs for the frigates which will all be
constructed in Adelaide by 2020. The locally developed CEA Phased-Array Radar would be inducted into
the design once construction commences. With regards to 19 vessel Pacific Patrol Boats (40 metre in
length) which are worth $500 million, local navy shipbuilder Austal Ships Pty Ltd has been selected as the
sole contractor which will deliver 2 of these (58 metres in length) in the first half or 2015. Very recently,
Austal Limited delivered RNOV Al Naasir (S12) High Speed Support Vessel (HSSV) to the Royal Navy of
Oman under a US$124.9 million contract.
2.3.6 Maritime Piracy in Indian Ocean
According to the ICC International Maritime Bureau, about 143 piracy cases were reported to have taken
place in the Indian Ocean in 2015 which is more than half of the global piracy figures for that year.
Considerably, 108 of them have happened close to the waters near Indonesia and Malaysia, due to the
large crass of islands spread across the region. Indonesia shares its maritime borders with at least 10
countries, including India and Australia, and its waters in the Straits of Malacca, one of the world’s busiest
trade routes that enables trade of India, China and Japan, however these straits also make Indonesia to a
host of security threats. In order to counter the threat, Swedish technology provider Saab has
collaborated with Indonesia’s ship building company “PT Lundin” to build a state of the art high-speed
missile combat vessel called Stealth Fast Attack Craft (FAC) that can more than match the littoral combat
ships (LCS) while still being easier to operate and a cheaper alternative for procurement.
PT Lundin has combined its innovative hull design and construction along with Saab’s renowned 9LV
Combat Management System and Fire Control System technology providing the watercraft the desired
stability during navigation. The high mounted sensor function provides the combat vessel with a sensor
range which matches that of a frigate, ideally justifying the vessel’s usability to detect, counter and
neutralize smuggling, piracy and terrorist threats. PT PAL, a government-owned Indonesian shipbuilding
company has built KRI Tombak, a KCR-60M missile attack craft coupled with two missile launchers and
KRI John Lie, a Bung Tomo class corvette designed to patrol & counter piracy in the far seas.
Indonesia has been modeling its fleet on the lines of the US Navy fleet in the Pacific since March 2015.
The country’s government increased its military expenditure by 16.48% in 2015 from its previous year
figures of US$ 6929 billion. The country’s objective by 2024 is to create an effective navy fleet comprising
of the following categories –
- The Combat Strike Group (110 vessels including 10-12 submarines, 56 frigates and corvettes, 26
missile- and 12 torpedo fast attack craft)
- The Patrol Group (66 patrol vessels), and a 98-vessel Support Force
Other countries that are affected by maritime piracy are India, Vietnam and East African nations like
In July 2016, India has purchased an aircraft carrier form Russia called Project 23000E Shtorm, which
has been developed to execute operations in near and far seas and combat with enemy troops both on
land as well as sea, ensure the operational stability of naval forces, protect landing troops, and provide
defense against air attacks. The country is currently engaged in tackling issues like terrorism, maritime
piracy, criminal infiltration, refugee crisis arising from neighbouring countries (Bangladesh, Nepal &
Bhutan) and hence requires a large allocation of its monetary resources to be directed towards the
defence industry. In the last 5 years, the country has raised its defence expenditure by 5.45% to US$
51.12 billion, however in the last 5 years around; the country has transitioned majorly from “buying” to
“making” naval ships. The initiative has only grown stronger ever since the advent of the ruling party
Bhartiya Janata Dal’s “Make in India” campaign with the development of a fund worth Rs. 100 billlion for
which, a number of banks including Exim Bank, IDBI Bank, IFCI have been roped in to contribute. Local
private shipbuilder Mazgaon Dock Limited, and Garden Reach Shipbuilders Engineers (GRSE) are
engaged in constructing complex weapon intensive ships like large surface combatants such as
destroyers & stealth frigates, and small combatants like corvettes. On the other hand, Goa Shipyard Ltd.
(GSL) and Hindustan Shipyard Ltd. (HSL) manufacture patrol boats, Naval Tankers, Landing Platform
docks, Survey vessels, MCMVs, tugs, & Barges for the Indian Navy. Each of these companies is
undergoing a naval modernization programme which includes 5 Warships, 3 OPVs, and 6 submarines
and a Dry Dock of 10,000 ton capacity. Other companies include Bharati Shipyard which has an order
backlog of 63 ships & is currently undergoing a restructuring programme with Edelweiss Asset
Reconstruction Co Ltd (Edelweiss ARC), a wholly-owned division of Edelweiss Financial Services Ltd,
pitching in an investment worth up to $100 million for the over-burdened defence contractor. Russia is
India’s most strategically compatible partner in the naval vessels market. Recently, Russia built an IAC-2
aircraft carrier labeled “Vikramaditya”, the latest entrant into the Indian fleet.
2.4 European Region
The European region has seen its military expenditure rise from US$ 390 billion to US$ 397 billion,
accounting for 22.55% of the world’s expenditure. Primarily countries like Germany, United Kingdom,
Italy, France and Russia are the leading spenders of defence expenditure. The top 5 companies in the
European naval vessels market are ThyssenKrupp (42.78 billion EUR), Fincanteri (4.183 billion EUR),
Sevmash (US$ 533 million), Thales SA (14.1 billion) and Damen Schelde Naval Shipbuilding. The naval
vessels market is primarily driven by key factors such as the Ukrainian acqueisance of the Russian
acquisition of Crimea, Middle East political instability, especially in Oman and Yemen and the refugee
crisis in Iraq and Syria due to the outbreak of militancy in the region.
Europe is also a major exporter of naval ships to Asian countries, which have seen a fair bit of military
action in the seas. Russia is the major European contributor that dominates the Southeast Asian market
for littoral and frigate/corvette vessels despite US efforts to penetrate the industry with its littoral combat
ships (LCS) – the monohull USS Freedom constructed by Lockheed Martin and the trimaran USS
Independence constructed by Austal USA. Countries including India, Indonesia, Malaysia and Vietnam
feature in the Russia’s list of clients when it comes to building naval strength. Russian Navy is also
looking for new berthing ports to set up its naval bases, prime choices being Cyprus and the Spanish port
of Melilla. During its acquisition of Crimea, the Russian ships used to visit the port for refueling and
resupply purposes, which enabled them to track a route to the Mediterranean Sea, further redirecting the
course into the Gulf of Aden. More availability of ports means more ships have the ability to travel enroute
which creates need for more ports in nearby water zones for better outreach. Through this route, the
Russians gained more exposure to ports like Tartus in Syria wherein Russian naval ships have been
attacking the anti-government rebels protesting the Assad rule and the ISIS militant incursion in
Southwest Syria. Ever since then, Russian warship manufacturers have been eyeing more production of
warships to supply needs during the war.
In 2011-12, Russia invested $78 billion in the construction of new ships and submarines for the Russian
navy. The country has increased its 2015 military expenditure level by a 7.53% from its last year figures of
US$ 84.697 billion. In Nov 2016, Russia’s fleet would consist of the Admiral Gorshkov, the lead ship of
the project 22350, Admiral Kasatonov which would be delivered to the Navy in last quarter of 2017 and 6
new frigates which would join the fleet by 2025. A series of 6 additional frigates are expected to be
received from its ongoing Admiral Grigororovich 11356 project. Admiral Kuznetsov, the country’s only
available aircraft carrier will be deployed into the Mediterranean Sea for 4 months.
In UK, the Royal Navy has been in steadily declining its fleet numbers ever since the start of the decade,
shrinking from a force of 89 ships in 2000 to 65 ships today. The Royal Navy’s current fleet includes only
19 destroyers and frigates with no operational aircraft carrier, in comparison to a fleet of three aircraft
carriers and 33 destroyers and frigates way back in 2000. US-UK bilateral relations are still on top of UK’s
list of political agendas, with the Royal Navy having deployed U.S. Marine F-35 Bs from its 2 aircraft
carriers clarifying the intentions of the UK to rebuild its reputation as a global maritime seaforce by
ensuring continuous collaboration and development of carrier strike capabilities.
(Naval Sea Systems Command website)
(Shipbuilders Council of America)
CONGRESSIONAL BUDGET OFFICE
(SIPRI Milex Report)
“Military expenditure by country, in constant (2014) US$ m., 2006–2015” SIPRI Report
(Spring 2015 Industry Study Final Report Shipbuilding
The Dwight D. Eisenhower School for National Security and Resource Strategy)
(“China Naval Modernization: Implications for U.S. Navy Capabilities—Background and Issues for
Congress” – US Congressional Research Service Report)
Huntington Ingalls – 10-K (year ending Dec 31, 2015)
Test Market Estimation (excel file attached)
Also refer the SD Test Excel file attached for statistics related to market size given on the first page.
United States –
World – Outlook