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EU turns to India's arms market
By Stephen Blank

Much diplomatic and journalistic ink has flowed recently concerning China's efforts to get the European Union to terminate its sanctions and resume arms sales to it. France and Germany, too, have each expressed the desire to persuade the European Commission, the EU's governing authority, to lift the sanctions. On the other hand, Washington weighed in strongly against this move, creating substantial pressure on the EU. Therefore it is not surprising that at its meeting on March 25-26, the commission said nothing publicly about the entire issue.

However, the EU has already decided conclusively to move in a big way into the Asian arms market, and not only with China, at least for now. Instead, its flagship arms company, the European Aeronautical Defense and Space Company (EADS) is pushing joint ventures with India, China's main continental rival in Asia.

The EU's motives are quite obvious. EADS executives predict that 20 percent of its arms sales will come from the Asia-Pacific by 2009, and 30 percent by 2015, and that does not necessarily include China or the Chinese defense market. Since current sales account for 7 percent of its revenues, this means a tripling and then quadrupling of current sales within a decade.

Moreover, India is increasingly viewed as a promising market for all kinds of high-tech ventures. Its economy is expected to grow nearly 10 percent this year, and Indians hope that this means the breakthrough to sustained long-term development, like China's trajectory in the past decade. But even if the Indian economy grows at about 6 percent annually, as it has over the past decade, this opens up substantial opportunities for foreign arms companies, especially as India has recently undertaken a vast modernization of its weapons systems, and is also trying to overhaul its dysfunctional defense industry.

Although EADS concluded an agreement in 2003 with China's state-owned AVIC II aircraft manufacturing group, the sanctions still in place inhibit military sales to China. No such barrier exists regarding India. And it is highly unlikely that Washington, which is itself expanding its defense sales to India, will object on the same grounds to EADS or the EU's presence in India, although the commercial rivalry between them may cause tensions. EADS' civilian center of gravity is the Airbus to deal with an expected increase of Asian passenger traffic, which will be considerably fueled by India and China. But its defense sales to India are equally, if not more interesting. The EU, like other sellers to India: Russia, Israel and the United States, will move away from "sub-contracting helicopters or selling missiles" to a more elaborate system. As reported by Aviation Week and Space Technology, this system entails long-term partnerships with both state and privately owned Indian defense firms.

This development is in line with India's program for reforming its indigenous defense industry through privatization and opening it up to foreign competition so that it will be forced to become more competitive and allow India to become a major weapons exporter in its own right.

Thus Hindustan Aeronautics Ltd, (HAL), India's major defense company, will become a global supplier for EADS of parts, components and assemblies. In other words, EADS and HAL will become partners in designing, developing and producing specific versions of helicopters, and this relationship might then spread to other weapons plants. In this respect, the development of EU relations with India's defense industry will resemble the Indo-Russian agreement to design, develop and produce a fifth-generation fighter aircraft.

So this kind of relationship is now becoming a common one in international defense relationships. Similarly, other EU members' firms are now submitting proposals to India's Ministry of Defense to build engines and air-to-air, air defense and anti-tank missiles. Undoubtedly, such partnerships will spread to other weapons systems and create a network that goes beyond leasing and sub-contracting to encompass joint design, development, production and marketing for a whole range of weapons. This goes far beyond anything now possible with China.

And it certainly accords with the growing diversification of India's foreign weapons purchases, a process that has led to major contracts with France, Israel, Great Britain and Italy, not to mention the US and Russia. Indeed, Indian analysts suspect that India will further Westernize its purchases due to the high price and relatively low quality of Russian weapons, parts and servicing compared to European, Israeli, and American systems. While this does not mean suspension of purchases from Russia, it does raise disturbing trends for the Russian defense industry. Both official and expert commentaries have expressed growing resentment and concern over India's excessive dependence on Russian arms, high prices, poor quality and service, and the slow pace of negotiations with Russia. For example, the negotiations for the Gorshkov aircraft carrier lasted for 10 years, almost as long as it would take to build one, and India ultimately had to pay dearly for the retrofitting of the carrier's Mig-29 fighters, which are no longer state of the art.

If India turns away from Russia it will represent a major blow to Russia's struggling defense industry, which gets 40 percent of its foreign sales revenues from exports to India, its largest customer. It will become even harder for that industry to compete globally or to become a reliable supplier to Russia's armed forces, a condition which it has yet to achieve. In turn, this could seriously set back Russia's industrial, defense industrial and overall military modernization.

EU sales to China, if they do materialize, will similarly affect Russian defense manufacturers, who now sell about 30 percent of their annual exports to China. Though China now buys between US$2 billion and $2.5 billion annually from them, increasingly it is buying technology and know-how rather than new weapons. Certainly, China, too, would prefer, all things being equal, to buy high quality foreign systems that it could then indigenize as India is now trying to do. Its track record with Russian purchases suggests as much to foreign observers. Thus if the EU lifts sanctions, not only will that seriously affect its relations with Washington and US ties to major EU producers like France and Germany, that decision will also seriously hurt Russian interests.

Though the Russian angle has not been explored publicly in the diplomatic moves and countermoves now under way, one can rest assured that the Kremlin fully understands what is at stake. Its efforts to obtain or at least retain market share in these two countries will necessarily increase, making the international arms market even more of a buyers' market, where India and China can make demands of sellers that would hitherto have been unthinkable.

Moreover, if the Asian-Pacific market becomes so much more competitive, we can expect a renewed push by Russia elsewhere: Southeast Asia, the Middle East, sub-Saharan Africa and South America in particular. But it is by no means clear that these areas can make up for what the Russian defense industry might lose if these projects go through and if sanctions are lifted. Nevertheless, the growth of Asian-Pacific economies clearly coincides with growth in their overall technological, and especially defense technological, and defense capabilities. And these growing capabilities may well come at the further expense of Russia's already fragile economic and strategic position in Asia.

Stephen Blank is an independent security affairs analyst residing in Harrisburg, PA.

(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact for information on our sales and syndication policies.)

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