Tuesday, October 22, 2013

China's arms industry makes global inroads

From the moment Turkey announced plans two years ago to acquire a long-range missile defense system, the multibillion-dollar contract from a key NATO member appeared to be a U.S. company's to lose.

For years, Turkey's military had relied on NATO-supplied Patriot missiles, built by the U.S. companies Raytheon and Lockheed Martin, to defend its skies, and the system was fully compatible with the air-defense platforms operated by other members of the alliance.

There were other contenders for the deal, of course. Rival manufacturers in Russia and Europe made bids. Turkey rejected those - but not in favor of the U.S. companies. Its selection last month of a little-known Chinese defense company, China Precision Machinery Export-Import Corp., stunned the military-industrial establishment in Washington and Brussels.

The sale was especially unusual because the Chinese missile defense system, known as the HQ-9, would be difficult to integrate with existing NATO equipment.

China Precision is also subject to sanctions from the U.S. for selling technologies that the U.S. says could help Iran, Syria and North Korea develop unconventional weapons. A State Department spokeswoman said this month that U.S. officials had expressed to the Turkish government "serious concerns" about the deal, which has not yet been signed.

Industry executives and arms-sales analysts say the Chinese probably beat out their more established rivals by significantly undercutting them on price, offering their system at $3 billion. Nonetheless, Turkey's selection of a Chinese state-owned manufacturer is a breakthrough for China, a nation that has set its sights on moving up the value chain in arms technology and establishing itself as a credible competitor in the global weapons market.

"This is a remarkable win for the Chinese arms industry," said Pieter Wezeman, a senior researcher at the Stockholm International Peace Research Institute, which tracks arms sales and transfers.

In the past, Chinese companies have been known mainly as suppliers of small arms, but that is changing quickly. From drones to frigates to fighter jets, the companies are aggressively pushing foreign sales of high-tech hardware to other nations, mostly in the developing world.

Russian companies are feeling the greatest pressure, but U.S. and other Western companies are also increasingly running into the Chinese.

"China will be competing with us in many, many domains, and in the high end," said Marwan Lahoud, the head of strategy and marketing at European Aeronautic Defence & Space, Europe's largest aerospace company. "Out of 100 campaigns, that is, the commercial prospects we have, we may have the Chinese in front of us among the competitors in about three or four. They have the full range of capabilities and they are offering them."

The Stockholm institute released a report this year on global weapons transfers that found the volume of Chinese conventional weapons exports - which included high-end aircraft, missiles, ships and artillery - jumped by 162 percent from 2008 to 2012, compared with the previous five years. Pakistan is the leading customer.

The institute now estimates that China is the fifth-largest arms exporter in the world, ahead of Britain. From 2003 to 2007, China ranked eighth.

China's foreign arms sales are also rising fast in dollar terms. According to IHS Jane's, an industry consulting and analysis company, Chinese exports have nearly doubled during the past five years to $2.2 billion, surpassing Canada and Sweden, and making China the world's eighth-largest exporter by value.

The total global arms trade revenue in 2012 was estimated to be $73.5 billion, and the U.S. had a 39 percent share, according to IHS Jane's.

Xu Guangyu, a retired major general in the People's Liberation Army and director of the China Arms Control and Disarmament Association, said in an interview that the push by Chinese companies to develop and sell higher-tech arms was "a very normal phenomenon."

"In arms manufacturing, China is trying to increase the quality and reduce price," he said. "We're driven by competition."

Xu said that besides pricing, Chinese companies had another advantage: They do not "make demands over other governments' status and internal policies."

He added: "Our policy of noninterference applies here. Whomever is in the government, whomever has diplomatic status with us, we can talk about arms sales with them."

Chinese officials know that China's encroachment on Western-dominated military markets raises concerns. When asked about the missile-defense sale to Turkey, a Chinese Foreign Ministry spokeswoman said, "China's military exports do no harm to peace, security and stability," and do not "interfere with the internal affairs of recipient countries."

The largest Chinese arms production companies, all state-owned, declined interview requests. Their finances are opaque, though there are some statistics on their websites and in the state news media.

The China North Industries Group Corp., or the Norinco Group, said on its website that its profits in 2012 were 9.81 billion renminbi, or about $1.6 billion, a 45 percent increase from 2010. Its revenues in 2012 were about $59 billion, a 53 percent increase over 2010.

Another company, the China South Industries Group Corp., or CSGC, said on its website that it had profits of about $1 billion, in 2011, on revenue of about $45 billion, both big increases over 2008.

China's investment has been heaviest in fighter planes - both traditional and stealth versions - as well as in jet engines, an area in which China has until now been dependent on Western and Russian partners, said Guy Anderson, a senior military industry analyst in London with IHS Jane's.

"China has been throwing billions and billions of dollars at research and development," he said. "They also have a strategy of using the gains they get from foreign partnerships to benefit their industrial sector. So they should not have any trouble catching up with their Western competitors over the medium term, and certainly over the long term."

He estimated that China was still a decade away from competing head-to-head with Western nations on the technology itself. But Chinese equipment is priced lower and could become popular in emerging markets, including in African and Latin American nations.

"We are in an era of 'good enough' - the 90 percent solution that will do the job at the best possible price," Anderson said. "In some cases, that may even mean buying commercial equipment, upgrading it slightly and painting it khaki."

New customers for Chinese equipment include Argentina, which in 2011 signed a deal with the Chinese company Avicopter to build Z-11 light helicopters under license. Mass production for the Argentine military began this year, and a total of 40 helicopters are expected to be built during the next several years. The value of the contract has not been made public.

Companies selling drones, another focal point in the Chinese arms industry, are ubiquitous at arms and aviation shows. At an aviation exposition in Beijing in late September, one Chinese company, China Aerospace Science and Technology Corp., had on display a model of a CH-4 reconnaissance and combat drone, with four models of missiles next to it.

Though the drone had been "designed for export," one company representative said, there were no foreign buyers yet. The company was still being licensed by the government to sell the aircraft abroad. He added that the drone was not yet up to par with some foreign models, and that the engine was a foreign make, though other parts - including the missiles - had been developed in China.

The Aviation Industry Corp. of China, or AVIC, had on display a model of a Wing Loong, the best-known Chinese drone export, which sells for about $1 million, less than similar U.S. and Israeli drone models. An article in People's Daily said the export certificate for the Wing Loong, or Pterodactyl, was approved in June 2009, and it was first exported in 2011.

At the Paris Air Show in June, Ma Zhiping, president of the China National Aero-Technology Import and Export Corp., told Global Times, another state-run newspaper, that "quite a few countries" had bought the Wing Loong, which resembles the U.S.-made Predator. Clients were in Africa and Asia, he said.

Two fighter jets made by Chinese companies are being closely watched by industry analysts and foreign companies for their export potential.

One is Shenyang Aircraft's J-31, a fighter jet that Chinese officials say has stealth abilities. A People's Daily report last month said that the J-31 was being made by Shenyang, an AVIC subsidiary, mostly for export, citing an interview with Zhang Zhaozhong, a rear admiral in the Chinese navy. In March, the airplane's chief designer, Sun Cong, told People's Daily that the J-31 could become China's main next-generation carrier-borne fighter jet.

The other jet is the JF-17, a less-sophisticated aircraft that a U.S. official said had been in the works for about two decades in an "on-again, off-again" project. The jet was ostensibly the product of a joint venture between Pakistan Aeronautical Complex and China's Chengdu Aircraft Industry Corp., also an AVIC subsidiary, but China did the real work, said the official, who spoke on the condition of anonymity because of the secrecy surrounding military projects. So far, Pakistan is the only client, and the official said he believed that the Pakistanis had made a "political decision" to buy it.

China is Pakistan's biggest ally, and each relies on the other to help counter India. Besides the JF-17, the two nations have had official joint production agreements on a frigate, a battle tank and a small aircraft.

A defense official from Japan, a territorial rival of China that monitors its arms trade closely, said Chinese jets still had big shortcomings that could hurt international sales; most notably, China cannot make reliable engines or avionics, he said. The JF-17 uses a Russian engine.

"I believe they can make a few very good engines in the laboratory, but they can't make it in the factory, kind of mass produce it in factories, because of lack of quality control and maybe experience," he said.

He added that Chinese engineers had been trying to develop an engine, the WS-10, a copy of a Russian model, but had been having problems.

It is not uncommon for customers to overcome weaknesses in Chinese manufacturing by buying Chinese platforms and outfitting them with better Western equipment.

Algeria placed an order last year for three Chinese corvettes, but is outfitting the ships with radar and communications equipment from Thales Nederland, a unit of the Thales Group, based in France. Thailand has been awarding contracts to the Saab Group, based in Sweden, to upgrade Chinese-built frigates, said Ben Moores, a senior analyst at IHS Jane's.

This year, a Chinese company was competing against foreign counterparts, including at least one U.S. company, for a $1 billion Thai contract for naval frigates, but lost to Daewoo of South Korea.

As China moves to catch up with established Western rivals, competing not only on price but also with comparable technology, Hakan Buskhe, chief executive of Saab, said his company and others would be likely to find themselves under pressure to cut their own research and development costs to lower pricing. That is a trend that could benefit North American and European governments looking to squeeze more ability out of shrinking defense budgets.

"We need to be able to develop more for less," he said.

Thursday, October 10, 2013

1% of the world population own more than 80% of the world wealth

Global wealth has risen by 68 per cent over the past 10 years to reach a new all-time high of $241 trillion and the United States accounts for nearly three quarters of the increase, Credit Suisse said in its World Wealth Report.

Average global wealth has hit a peak of $51,600 per adult but this is spread very unevenly, with the richest 10 per cent owning 86 per cent of the wealth, analysts at the Credit Suisse Research Institute said.

The top 1 per cent alone owns 46 per cent of all global assets.

The report further said that global wealth may jump another 40 per cent by 2018 to reach $334 trillion.

The richest nations, with wealth per adult of more than $100,000, are concentrated in North America, Western Europe and among the rich Asia-Pacific and Middle Eastern countries.

They are headed by Switzerland, where average adult wealth amounts to $513,000, followed by Australia, Norway and Luxembourg.

However, two thirds of adults in the world have assets worth less than $10,000 and together account for just 3 per cent of global wealth.

Since mid-2012, the number of millionaires worldwide has risen by nearly two million, the vast majority of them in the United States, the report said. By contrast, Japan lost 1.2 million millionaires during the same period.

The rise in US wealth has been driven by a recovery in house prices and a bull equity market.

In Japan, the central bank's aggressive monetary policy drove the yen/dollar exchange rate down by 22 per cent, leading to a drop in household wealth of $5.8 trillion this year alone, equivalent to 20 percent of Japanese net worth, the report said.

Despite its strong economic growth over the past decades, Chinese hold barely 9 per cent of global wealth while accounting for more than a fifth of the global adult population.

For Africa and India, the population share exceeds the wealth share by a factor of ten, the report showed.

Credit Suisse said there were 98,700 individuals with net worth exceeding $50 million, more than half of them in the United States. Europe ranked second, home to nearly 25,000.

The biggest emerging markets, the so-called BRIC countries - Brazil, Russia, India, and China - are each estimated to have around 5,830 such ultra-high net worth individuals.

Nevertheless, the number of billionaires in the BRICs has risen from 5 percent of the world's total in 2000 to 19 per cent in 2010. Between 2000 and 2010, the number of billionaires in China alone rose from 1 to 64, the study showed.

By contrast, the number of billionaires in older developed countries such as France and Japan fell in that period.