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Market Overview – Naval Vessels & Surface Combatants

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Market Overview – Naval Vessels & Surface Combatants

  1. 1. 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 - Destroyers - Frigates • Small Surface Combatants - Littoral zone ships - Corvettes • 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).
  2. 2. 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.
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. outlays such as patrol boats & tankers or being solely focusing on non-core operations for a temporary period. 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
  7. 7. 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 Nigeria. 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
  8. 8. 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.
  9. 9. Sources: http://www.huntingtoningalls.com/wp-content/uploads/2016/09/hii_factsheet.pdf www.hhiir.com/Class/download.asp?filename=PT2016_09_Eng.pdf&filepath=Quick/EN http://www.seaspan.com/noncombatshipbuilder http://www.nvr.navy.mil/NVRSHIPS/SBF/DEF_SBF.HTM http://www.nvr.navy.mil/NVRSHIPS/FLEETSIZE.HTML (Naval Sea Systems Command website) https://shipbuilders.org/us-navy-shipbuilding (Shipbuilders Council of America) http://www.globalsecurity.org/military/library/report/cbo/50926-Shipbuilding-2.pdf CONGRESSIONAL BUDGET OFFICE https://www.sipri.org/sites/default/files/Milex-world-regional-totals.pdf (SIPRI Milex Report) “Military expenditure by country, in constant (2014) US$ m., 2006–2015” SIPRI Report http://es.ndu.edu/Portals/75/Documents/industry-study/reports/2015/es-is-report-shipbuilding-2015.pdf (Spring 2015 Industry Study Final Report Shipbuilding The Dwight D. Eisenhower School for National Security and Resource Strategy) http://www.defencenews.com/story/defence/naval/ships/2015/08/22/shipbuilding-navy-bath-iron-works- general-dynamics-huntington-ingalls-pascagoula/32115385/ http://www.dailymail.co.uk/sciencetech/article-3498524/A-glimpse-warship-future-Super-stealth-Ghost- vessel-skates-water-increase-speed-stormy-seas.html http://www.militaryfactory.com/ships/detail-page-2.asp?ship_id=Juliet-Marine-Ghost-Stealth-Boat http://www.bloomberg.com/news/articles/2014-08-21/juliet-marines-ghost-boat-will-be-hard-sell-to-u-dot- s-dot-navy http://www.globalfirepower.com/country-military-strength-detail.asp?country_id=china http://www.navyrecognition.com/index.php/news/defence-news/year-2015-news/february-2015-navy- naval-forces-defense-industry-technology-maritime-security-global-news.html?start=26 http://www.abc.net.au/news/2016-04-15/china-miscalculates-fijian-support-for-south-china/7331030 http://edition.cnn.com/2014/08/27/us/ghost-stealth-warship-prototype/ http://themess.net/forum/military-discussion/146270-japan-reveals-final-design-of-future-trimaran- combatant-for-patrol-ship-and-mcmv http://www.cbc.ca/news/politics/liberal-shipbuilding-irving-1.3347779 http://www.rcinet.ca/en/2015/10/07/more-trouble-for-canadas-navy-and-its-only-destroyer/ https://www.theguardian.com/world/2015/jan/14/japan-reveals-record-defence-budget-as-tensions-with- china-grow http://www.marinelink.com/news/shipbuilding-threatens414928.aspx http://www.janes.com/article/62336/new-zealand-confirms-south-korea-s-hhi-for-fleet-tanker-programme http://www.shippingherald.com/hyundai-heavy-wins-493m-contract-for-ice-capable-nz-tanker/ http://www.hhiir.com/en/company/busipart_01.asp http://www.janes.com/article/60534/dsme-looks-to-spin-off-defence-business http://www.ship-technology.com/features/featuretrade-winds-the-ten-biggest-shipping-companies-by- revenue-4945231/featuretrade-winds-the-ten-biggest-shipping-companies-by-revenue-4945231-3.html http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4 https://www.fas.org/sgp/crs/row/RL33153.pdf (“China Naval Modernization: Implications for U.S. Navy Capabilities—Background and Issues for Congress” – US Congressional Research Service Report) http://fairplay.ihs.com/ship-construction/article/4270766/csic-has-completed-merger-of-dalian-and- shanhaiguan-shipyards http://natoassociation.ca/indonesias-naval-modernization/ http://natoassociation.ca/indonesias-naval-modernization/  Huntington Ingalls – 10-K (year ending Dec 31, 2015)  Test Market Estimation (excel file attached)  World Bank  SIPRI  Also refer the SD Test Excel file attached for statistics related to market size given on the first page.
  10. 10. India – https://sputniknews.com/military/20160722/1043439885/india-dock-aircraft-carriers.html http://cimsec.org/fiscal-pearl-harbor/23244 https://sputniknews.com/asia/20160621/1041704060/navy-indiakorea.html http://www.worldpoliticsreview.com/articles/14799/naval-ties-economic-interests-drive-india-s-outreach-to- oman http://www.thehindu.com/business/Industry/govt-announces-incentives-for-shipbuilding- industry/article7919789.ece http://www.livemint.com/Home-Page/FLnnkcHLthYMuAzLTEBaAN/Govt-considering-Rs10000-crore- shipbuilding-fund-in-budget.html http://www.livemint.com/Home-Page/FLnnkcHLthYMuAzLTEBaAN/Govt-considering-Rs10000-crore- shipbuilding-fund-in-budget.html Canada – http://news.nationalpost.com/news/canada/government-changes-course-on-26-billion-warship-program- in-hopes-vessels-will-be-delivered-sooner http://www.navalreview.ca/2014/10/ship-cuts-send-rcn-naval-ranking-tumbling-according-to-their-own- system/ http://www.cbc.ca/news/politics/navy-tough-decisions-1.3649643 United States – http://nationalinterest.org/blog/the-buzz/the-us-navy-back-more-ships-more-technology-more-firepower- 16331 https://news.usni.org/2016/01/12/navy-weighing-options-for-a-family-of-future-surface-ships http://www.defencenews.com/story/defence/naval/ships/2015/08/22/shipbuilding-navy-bath-iron-works- general-dynamics-huntington-ingalls-pascagoula/32115385/ China – http://nationalinterest.org/blog/the-buzz/watch-out-america-china-may-have-415-warships-by-2030-12979 http://www.globalsecurity.org/military/world/china/budget.htm http://www.popsci.com/amphibious-drone-makes-first-flight Australia – http://nationals.org.au/the-governments-plan-for-a-strong-and-sustainable-naval-shipbuilding-industry/ http://www.aspistrategist.org.au/australias-many-maritime-strategies/ Russia – http://www.upi.com/Business_News/Security-Industry/2016/08/24/Russia-investing-in-new-ships-naval- bases-to-project-its-power/8551472060557/ World – Outlook http://nationalinterest.org/feature/the-5-most-powerful-navies-2030-16723?page=2 http://in.rbth.com/opinion/2016/06/27/which-countries-will-have-the-most-powerful-navies-in-2030_606411 http://www.nationaldefencemagazine.org/archive/2008/October/Pages/Naval%20Forces%20See %20Greater%20Demand%20for%20Large%20Amphibious%20Ships.aspx

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