Paul Thomen

Thursday, 27 June 2013

Sri Lankan Defense Industry Grow at a CAGR of 6.12% by 2018

The Future of the Sri Lankan Defense Industry – Market Attractiveness, Competitive Landscape and Forecasts to 2018 offers the reader an insight into the market opportunities and entry strategies adopted by foreign original equipment manufacturers (OEMs) to gain market share in the Sri Lankan defense industry.

Driven by de-mining, rehabilitation, and the country’s strained relationship with India, Sri Lanka’s defense industry is set for a healthy growth at a CAGR of 6.12% between 2013 and 2018, with a total of US$10.7 billion to be spent during that period. Additionally, the Post-LTTE Tamil movement, clashes between Buddhists and Muslims, and Maritime Security are expected to drive the country’s Homeland Security expenditure. However, the country’s relatively small defense budget, along with corrupt practices in the defense procurement process, limit the industry’s growth, according to Strategic Defence Intelligence’s recently released Future of the Sri Lankan Defense Industry – Market Attractiveness, Competitive Landscape and Forecasts to 2018.

De-mining & Rehabilitation Efforts
The priority task for the Sri Lankan Army is the de-mining of the region that was previously in the control of the Liberation Tigers of Tamil Eelam (LTTE), as it deployed large quantities of anti-tank mines and other Improvised Explosive Devices (IEDs) whilst retreating. These mines render the area - which is approximately 1500 sq. km - incapable of habitation.

Further precipitant damage of past conflict in Sri Lanka was the destruction of cities and villages in the northern part of the country, by separatists and the armed forces alike. The Sri Lankan Army has undertaken responsibility for the rehabilitation and management of these area, which is expected to continue to 2018. Additionally, the Army operates rehabilitation centers that house 11,000 surrendered LTTE cadres, along with approximately 300,000 civilians who were displaced during the war.

Strained Relationship with India
As Sri Lanka improves its relationships with China and Pakistan, greater strain is being placed on its relationship with India. The former’s development of a port in Hambantota that could easily be converted into a Chinese naval base is seen as a significant threat to India’s national security. Additionally, Sri Lanka plans to train Pakistani army personnel in anti-guerilla warfare, which combined with the Indian Tamil political leaders’ tirade against Sri Lanka has agitated an already volatile situation.
Demonstrations against war crimes have forced India to vote against Sri Lanka in the US sponsored resolution in the UN Human Rights Council, and all of these factors contribute to rise in perceived security threat levels in Sri Lanka, which consequently is expected to stimulate defense expenditure over the next 5 years.

Post-LTTE Tamil Movement
The Sri Lankan government considers surviving LTTE members a security threat. Approximately 11,000 detainees with suspected LTTE links have been screened out to rehabilitation camps in the north of the country, and are currently held with no legal framework. Furthermore, following the conflict, a number of organizations supporting the notion of an independent Tamil homeland have come into being; the key difference between these new groups and their LTTE forebears is that they primarily advocate non-violent methods, and therefore cannot be officially outlawed. Despite this, they continue to be perceived by the government as a threat, and this will drive homeland security expenditure in Sri Lanka to 2018.

Clashes Between Buddhists & Muslims
Sri Lanka recently witnessed demonstrations and clashes between Buddhists and Muslim minorities over the issue of Halal certification of meat, which Buddhists claim hurts Sinhalese businesses. The growing Sinhala Buddhist nationalist movement – also known as Bodu Bala Sena -  is threatening to affect the internal stability of the country, and has therefore been earmarked by Strategic Defence Intelligence as one of the key drivers of increased homeland security expenditure in Sri Lanka to 2018.

Maritime Security
Globalization has placed the criticality of Indian Ocean sea routes for oil transportation and maritime trade into focus, and research suggests an increase in pirate attacks on ships in this area will drive Sri Lankan investment in maritime security to 2018.


Limited Military Expenditure
In relative terms, Sri Lanka’s defense expenditure is limited; with only limited military modernization plans set to 2018, its contribution to global defense expenditure will continue to be low. Whilst Sri Lanka is expected to invest US $10.7 billion in its armed forces over the next five years, only US$0.4 billion of that money is set to be spent on the acquisition of new military hardware, offering foreign Original Equipment Manufacturers (OEMs) limited opportunities in the country.

Incidents of malpractice within Sri Lanka’s military industrial base may limit the growth of the country’s defense sector. In addition to damaging the country’s image in the global arms market, it also discourages foreign OEMs from market entry.

For example, in 2010, the former Sri Lankan army chief was found guilty of favoring the defense firm of his son-in-law, and was subsequently convicted. Furthermore, the government has been accused of siphoning off a portion of the contract money for the acquisition of four MiG-27 aircraft and the overhaul of three other MiG-27 craft and a MiG-23 UB trainer contract awarded to the Ukraine in 2006. The government has also been accused of transferring money to a proxy firm in the UK. All of these factors are seen by Strategic Defence Intelligence as severe impediments to the future growth of the Sri Lankan defense industry.

Table of Content

Market Attractiveness and Emerging Opportunities
3.1. Defense Market Size Historical and Forecast
3.1.1. Sri Lankan defense budget to grow at a CAGR of 6.12% over the forecast period
3.1.2. De-mining and rehabilitation efforts and a strained relationship with India are expected to drive defense expenditure
3.1.3. Sri Lankan defense expenditure as a percentage of GDP set to decrease over the forecast period
3.2. Analysis of Defense Budget Allocation
3.2.1. Share of capital expenditure expected to remain low over forecast period
3.2.2. Need to replace obsolete equipment to drive defense capital expenditure
3.2.3. The army accounts for the largest share of defense expenditure
3.2.4. The country is expected to invest US$6.9 billion in its Army during the forecast period
3.2.5. Naval defense budget projected to grow at a CAGR of 6.30% during the forecast period
3.2.6. Air Force expenditure expected to register CAGR of 5.84% during the forecast period
3.2.7. Per capita defense expenditure expected to increase over the forecast period
3.3. Homeland Security Market Size and Forecast
3.3.1. Sri Lankan homeland security expected to grow over the forecast period
3.3.2. Post-LTTE Tamil movement, clashes between Buddhists and Muslims, and Maritime Security are expected to drive Sri Lankan homeland security expenditure
3.3.3. Sri Lanka falls under "some risk" of terrorism category
3.4. Benchmarking with Key Global Markets
3.4.1. Sri Lankan defense budget expected to increase over the forecast period
3.4.2. Sri Lankan military expenditure remains limited compared to countries with the largest defense expenditure
3.4.3. Compared to countries with leading defense expenditure, the country allocates a higher percentage of its GDP towards defense
3.4.4. Sri Lanka faces high threat from foreign terrorist organizations
3.5. Market Opportunities: Key Trends and Growth Stimulators
3.5.1. Demand for small arms and ammunitions are expected to surge over the forecast period
3.5.2. Demand for transport helicopters expected to surge during the forecast period
3.5.3. Air force modernization will create demand for combat aircraft

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