WASHINGTON — A global push to grow domestic defense industries will have a dramatic impact on the Western defense export market over the next decade, a new report is warning.

Authored by Daniel Yoon and Doug Berenson, the report by Avascent, "Dynamics of International Military Modernization 2016," concludes that while many challengers will emerge, the trio of Israel, South Korea and Brazil provide the most immediate threats to Western markets

Ironically, the market threat is one with its origins in Western exports, with the authors noting that "in many cases, these emerging players developed through diffused technology via prior export arrangements with Western suppliers, often through offsets requirements and domestic industry participation."

Over the last five years, American firms have aggressively pursued foreign sales to try and offset a slowdown in US military funding. By and large American firms were successful in that strategy, the authors found, with "foreign sales have partially offset the decline in domestic demand since 2010, when only 17 percent of defense equipment manufactured in the United States was exported; by 2015, that number jumped dramatically to 34 percent."

That plan is even more critical for the UK, Germany, France and Italy, which represent the four largest defense industrial bases in Western Europe. Those first three nations rely on exports for roughly half of their military sales, while Italy relies on exports for a stunning 82 percent of its military sales.

However, the dominance of Western exports will face challenges in the near future – with the biggest threat coming from the customers themselves.

"The growing trend of homegrown defense industries is behind much of the competitive change in the international defense market," the authors found. "Many countries desire indigenous defense industries on strategic or economic grounds, or both. They have often nurtured these nascent industries through political protection and stringent offset requirements in deals involving foreign suppliers, often absorbing these suppliers' technical expertise in the process."

These measures "allowed the host countries to source increasingly from domestic producers rather than foreign ones, thus 'crowding out' many legacy players in that particular market," the authors added. "Several of these industries have since even become competitive against Western exports in other markets, a trend expected to be reinforced over the next 10 years."

So who will be the competition? Japan and India are the obvious examples, but the analysts argue neither will emerge as major exporters due to cultural reasons (Japan) and bureaucratic ones (India). Singapore and Turkey have some capabilities, but lag behind. And while Russia and China are both capable of producing high-end tech, neither nation is likely to take a huge chunk out of the markets that the Western nations currently export to.

Instead, the big challengers will come in the form of South Korea, Brazil and Israel, with each nation has its own strengths.

A table from the Avascent report

Photo Credit: Avascent

A table from the Avascent report

Photo Credit: Avascent

Israel, for example, has grown significantly in the radar, missile, and particularly unmanned system markets. Israel's unmanned systems are already competitive with US hardware globally.

South Korea's T-50 trainer design, as well as its upcoming indigenous fighter, could drive gains in the aerospace market, while its "ability to domestically produce advanced destroyers, frigates, amphibious assault vessels, and attack submarines will provide significant export opportunities over the next 10 years," the authors write.

Brazil will likely lag behind those two nations, but has wisely targeted several niche markets to go after. Write the authors, "Embraer's entry into niche regional and lower-tier markets with light attack aircraft, light transport aircraft, and low-end ISR and maritime patrol aircraft will allow it to compete in a modest manner over the next 10 years. Moreover, its partnership with Saab in the co-production of the Gripen fighter ensures an industrial connection to Western markets into the future."

To read the full report, please click here. http://www.avascent.com/2016/05/download-dynamics-international-military-modernization-2016/

Email: amehta@defensenews.com

Twitter: @AaronMehta

Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.

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