Key Export Markets for U.S. Defense Suppliers A quantitative - PowerPoint PPT Presentation

EDITED FOR PUBLIC RELEASE PRIVATE & CONFIDENTIAL Key Export Markets for U.S. Defense Suppliers A quantitative analysis of Vietnam Prepared for:

August 2016 Vietnam: Budget Transparency Prioritization of maritime deterrence spurs spending on naval systems Not Transparent Transparent Threat Environment and Spending Drivers GDP & Defense Spending (millions USD)  Commitment to expand maritime assets leads to marquee $8,000 $350,000 acquisition projects for Vietnamese Navy $7,000 — The Vietnamese Navy in 2015 received the first four of six Kilo- $300,000 class submarines ordered from Russia in 2009, supplementing $6,000 two Yugo-class midget submarines received from North Korea in $250,000 1997 and boosting undersea surveillance capabilities $5,000 — The PAVN is also expected to receive its third and fourth Gepard- $200,000 class guided missile stealth frigates in 2016 and 2017, $4,000 $150,000 respectively, for conducting anti-submarine warfare operations, $3,000 and are in negotiation for two more $100,000 — Four Sigma-class corvettes equipped with Exocet missiles from $2,000 the Netherlands have been ordered in 2013, with deliveries $50,000 expected beginning in 2018 $1,000  Diversification of arms supply sources $- $- — Vietnam has mainly imported defense equipment from Russian 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 suppliers in the past, but has begun turning to the United States Procurement GDP Defense Budget and Japan for security assistance in the maritime domain Forecast Summary — The lifting of the American arms embargo in 2014 will provide Exchange GDP Defense Investment Vietnam with 25 used coast guard cutters over the next five Rate Growth Growth Growth years, and lead to the transfer of more maritime surveillance and 21905 9.4% 9.4% 9.4% patrol platforms through the out-years — Dutch patrol vessels, Russian anti-ship missiles, and Israeli rifles are now produced in Vietnam – possible Indian and Israeli Defense spending growth outpaced GDP growth agreements have suggested similar arrangements Defense from 2005-2014; two rates will even out over the Spending Economic Outlook next five years Outlook  Buoyed by strong exports and foreign investment, Vietnam will likely remain the strongest and fastest-growing economy in the ASEAN Vietnam’s current rapid modernization plans will Defense region in the near future force O&M accounts to swell for new equipment, Accounts  State-owned enterprises (SOE) provide almost a quarter of GDP while personnel accounts steadily decline and Outlook growth, and planned structural reforms may introduce risk investment remains steady EDITED FOR PUBLIC RELEASE PRIVATE & CONFIDENTIAL | AVASCENT | 2 NOTE: GDP is drawn from the IMF and all figures are nominal; growth rates are for 2016-2021

Vietnam Armed Forces (People's Army of Vietnam) Organizational structure may obscure actual flows of influence in the defense procurement process People’s Army of Vietnam Organizational Chart Discussion  The organizational hierarchy of the People’s Ministry of National Defense Army of Vietnam (PAVN) largely follows the General Ngô Xuân Lịch structural architecture of other communist governments, with the armed forces strictly General Staff Department General Political Department subordinate to the Communist Party of Lieutenant General Phan Văn Giang Colonel General Lương Cường Vietnam  The president and prime minister are just General General two of 21 members of the Central Military General General Department of Department of Commission, with the General Secretary of Technology Logistics Defense Defense the Communist Party of Vietnam as Department Department Industry Intelligence secretary and Minister of National Defense Lieutenant Lieutenant Lieutenant Lieutenant General Lê Quy (the country’s highest-ranked military General Duong General Nguyen General Pham Dam Van Ra officer) as deputy secretary Duc Lam Ngoc Hung  The procurement process, particularly from General foreign suppliers, is likely conducted and Department of subject to approval at the highest levels Foreign  The General Department of Defense Relations Industry, one of several “general Lieutenant departments” under the Ministry of General Vu Chien Border National Defense, oversees a number of a Air Defense Navy Thang Guard (Air Force) Rear state-owned domestic defense enterprises, Major Lieutenant Admiral while the General Department of Foreign General General Phạm Hoài Military Relations likely is tasked with coordinating Hoàng Corps Arms Lê Huy Vịnh Nam Regions Xuân Chiến matters related to defense and security cooperation with international counterparts Entrenched military production units may also affect transparent foreign supplier relations EDITED FOR PUBLIC RELEASE PRIVATE & CONFIDENTIAL | AVASCENT | 3

Vietnam Offsets & Defense Policy Offset Policy Discussion  The Vietnamese Ministry of Defense has not established formal defense  The Vietnamese armed forces quadrupled defense spending between 2005 and 2012 offsets requirements and doubled it between 2010 and 2015  An under-developed, strictly state-owned domestic defense industry has  The Vietnamese naval and air forces have resulted in an historic dependence on imports, dominated by Russian benefited most from the increase in sources but also increasingly open to Western suppliers in recent years defense spending, following the  A high reliance on imports has undermined the ability of the Vietnamese identification of maritime domain government to demand offsets, favoring foreign suppliers awareness as a key strategic priority  Legislation passed in 2011 prohibits the sale of stakes in the country’s  The gradual diversification of suppliers state-owned defense sector, which effectively prevents private sector away from Russian dominance provides participation or foreign direct investment and therefore is likely to significant opportunities for Western exacerbate the reliance on imports defense firms in the near- to mid-term  Vietnamese military customers appear to favor government-to-government Challenges defense deals negotiated between heads of government rather direct commercial agreements  Absence of clarity in procurement  Foreign suppliers that agree to co-production arrangements are also likely strategy: the Vietnamese armed forces to be preferred in future arms sales have not outlined a clear set of procurement priorities, with its latest national security strategy issued in 2009  Absence of clarity in procurement process: Obligation Percent ambiguity in the decision-making process Threshold Indirect / Direct will likely result in confusion and N/A N/A N/A inefficiencies in the near-term Under-developed domestic defense industry will prolong dependence on imports in the near-term EDITED FOR PUBLIC RELEASE PRIVATE & CONFIDENTIAL | AVASCENT | 4

Vietnam Defense Summary  Ambitious, double-digit year-on-year growth in defense spending over the past decade signals commitment to upgrade defense capabilities, will persist through the forecast window  Emphasis on maritime modernization will continue to drive spending on surface combatants and advanced coastal and maritime surveillance systems  Nascent, uncompetitive domestic defense industry will reinforce armed forces’ reliance on foreign imports through the near- and mid-term, historically of Russian origin but increasingly from Western sources as geopolitical balance shifts  Ambiguous, not clearly defined procurement process and strategy may introduce uncertainty at the beginning of newly established buyer-seller relationships EDITED FOR PUBLIC RELEASE PRIVATE & CONFIDENTIAL | AVASCENT | 5