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 Indonesia Prepared for:

August 2016 Indonesia: Budget Transparency Regional security concerns spur ambitious defense modernization plan Not Transparent Transparent Threat Environment and Spending Drivers GDP & Defense Spending (millions USD)  Maritime security concerns surrounding the South China Sea spurs $16,000 $1,600,000 naval modernization $14,000 $1,400,000 — The "Global Maritime Fulcrum” initiative calls for a naval procurement strategy that focuses on securing littorals and $12,000 $1,200,000 surrounding waters — Earlier this year, South Korea delivered the first of three $10,000 $1,000,000 modified Chang Bogo-Class Submarines while Indonesia $800,000 proceeds with plans to modernize the KCR-60M fast attack boats $8,000  Aging airborne fleet revitalizes need for updated squadrons to $6,000 $600,000 secure sovereign airspace — Negotiations with Russia to acquire eight SU-35s continue to $4,000 $400,000 move forward in an effort to update aging F-5 squadrons and $2,000 $200,000 increase defense industrial cooperation — The US recently approved a sale of 36 AIM-120C-7 AMRAAMs to $- $- re-arm Indonesia's F-16s 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021  Domestic security requirements drive ground vehicle procurement Defense Budget Procurement GDP Forecast Summary — Despite concerns from European nations, Indonesia will acquire upgraded third-gen Leopard 2 MBTs and Marder 1A3 IFVs from Exchange GDP Defense Investment Germany to modernize mechanized brigades in an effort to Rate Growth Growth Growth enhance island border security 13,478 8.8% 14% 17%  Diversifying suppliers to access military hardware that better fits national security needs — Relations with non-Western suppliers such as South Korea and Recent economic growth and regional security goals Defense Russia drive interest in technology transfer to develop the have fueled state ambitions to grow defense Spending indigenous defense industry spending to 1% of GDP by early 2020s Outlook Economic Outlook  Plans to infrastructure funding and lower interest rates will boost Naval and airborne acquisition plans to increase Defense economic expansion while stimulating private investment and trade procurement account in the near-term, but give Accounts way to increased O&M spending as new platforms  Decreasing inflation and GDP growth will promote recovery since Outlook are absorbed over time 2015 slowdown 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

Indonesian Ministry of Defense Democratic reforms have separated the armed forces and MoD, creating a modern civilian-military dichotomy Government & MoD Organizational Chart (June 2016) Discussion  Historically, the armed forces have played President a large role in MoD policy, including Joko Widodo procurement decisions  In 2004, the Indonesian legislature passed a series of reforms designed to separate Minister of Defense Ryamizard Ryacudu the civilian government and the military  These reforms kept the combatant Secretary Special Advisors General commands intact, but placed the newly- reformed MoD in charge of policy, Inspector General procurement, and the budgetary process  Reforms have had a large impact on procurement policy and the defense Defense Defense Defense Defense Defense Planning Facilities Strategy Potential Strength industrial base—there is more emphasis Directorate Directorate Directorate Directorate Directorate on developing domestic capabilities while creating a space for foreign competition when appropriate (e.g. joint ventures and Research and Education technology transfers) Development and Training Agency Agency Data and Casualty Fiscal Codes Information Rehabilitation Center Center Center Center MoD: Ministry of Defense, Source: Indonesia: A Country Study, Library of Congress EDITED FOR PUBLIC RELEASE PRIVATE & CONFIDENTIAL | AVASCENT | 3

Indonesian Offsets & Defense Policy Offset Policy Discussion  Indonesia’s offset policy was launched in 2014. However, it is still waiting  Traditionally, foreign suppliers dominate for clearance from the President and provisions, such as the minimum imports for advanced defense requirements, however, recent threshold and indirect/direct contribution obligation, remain unclear investments in facilities for complex  Policy will be implemented by the Defense Industrial Policy Committee platform construction indicate that this  An initial 35% must be offset through domestic industry dynamic may change  Key procurement laws are being revised to  Offsets increase 10% every five years until 85% of the contract is reached stimulate the creation of small and  Regulations are vague, providing little direction as to how the policy will be medium defense enterprises in an effort applied only to suggest that joint-ventures, counter-trade agreements, and to establish a formal supply chain technology transfers are also viable methods to satisfy the law Challenges  Key focus areas include (previously closed to foreign investment):  Indonesian procurement has been mired  Raw materials for explosives (foreign investment limit: 49%) in corruption and budget woes as the  Explosive materials and subsequent components (foreign nation tries to establish a domestic investment limit: 49%) industry - creating a transparent defense market will be a critical priority  Weapons, ammunition, explosive devices, and war equipment (foreign investment limit not yet available)  The lack of an industrial base has previously stifled foreign investment— efforts to create a domestic infrastructure Obligation Percent Threshold Indirect / Direct will be paramount in establishing a healthy partnership with foreign firms TBD ≥35% TBD Newly-established offset policy indicates that growing the domestic defense industry is a priority EDITED FOR PUBLIC RELEASE PRIVATE & CONFIDENTIAL | AVASCENT | 4

Indonesian Defense Summary  Regional security concerns drive naval modernization, with a heavy focus on littoral operations and undersea warfare  Indonesia continues to expand its relationship with non-traditional defense suppliers such as South Korea  35% offset requirement aimed at growing domestic industrial base and spurring new foreign partnerships  Government reforms of key procurement laws will help grow small and medium domestic defense suppliers, creating an established local supply chain  As inflation slows and economic expansion continues, the MoD expects to significantly grow defense expenditure to position itself as a larger power in S.E. Asia EDITED FOR PUBLIC RELEASE PRIVATE & CONFIDENTIAL | AVASCENT | 5