Turning point: Vietnam Industry Briefing
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1 Jane's Defence Weekly [Content preview Subscribe to IHS Jane s Defence Weekly for full article] Turning point: Vietnam Industry Briefing As its national interests expand and strategic threats intensify, Vietnam arguably has an unprecedented need to modernise its military, reports Jon Grevatt Vietnam has arrived at a key moment in its long history. Its territorial disputes with China have intensified while its assets have grown at a considerable rate. As a result, Vietnam has arguably never had greater need to develop a highly capable military. Yet Hanoi seems determined to rise to the challenge. The government is, at last, allocating expanding funds for the military to replace its increasingly obsolete inventories, while also pursuing diplomatic engagement with allies near and far. The United States, its one-time enemy, can now even be regarded as a key partner. Reforms to further professionalise the Vietnam People's Army (VPA) are under way, as is a small-scale defence-industrial revolution intended to spur capability developments, safeguard the supply of equipment, and reduce dependency on imports. On top of all that in January 2016 the Communist Party of Vietnam (CPV) will stage its 12th National Congress, which will introduce new leaders, including a new prime minister, along with fresh economic and defence policies. Defence spending Vietnam: Defence budget, (IHS) Article 1 Page 1 of 14
2 Vietnam's recent economic development has been strong but uneven, constrained by what the World Bank described in late 2012 as "inefficiencies" within its manufacturing and financial sectors. Yet signs are emerging that, while economic challenges remain, policies and reforms are taking root that could underpin strong defence spending increases over the medium term. According to IHS Global Insight, Vietnam's annual GDP growth averaged 5.6% between 2012 and While its near-term expansion will now be dampened by lower oil prices, positive factors over the next few years include stabilising inflation and continuing reforms to promote exports, privatisation, and foreign direct investment. These factors are forecast by IHS Global Insight to enable Vietnam's GDP to climb at an average of about 6.5% yearly in Vietnam: Defence spending by force, (IHS) Strategic drivers The need to spend more on defence can be linked directly to the country's stated commitment to protect its economic growth, which hinges on the development of key industries, particularly energy. This diverges from the country's traditional requirement to tackle internal conflict and secure land borders, which spurred the rise of Vietnam's dominant land forces. With internal risks largely abated, Vietnam's most prominent strategic driver is now firmly based offshore. Vietnam's claimed exclusive economic zone in the South China Sea contains considerable resources, which partly explain neighbouring China's interest in claiming much of the same territory. Underlining the significance of the oil and gas industry to Vietnam's economy, US government investor reports estimate that PetroVietnam, Vietnam's biggest company, accounts for about 20% of the nation's GDP and contributes around 25-30% of the state budget. Vietnam now has Asia's third-largest national crude oil reserves, behind China and India, according to the US Energy Information Administration (US EIA). In 2015 the US EIA put Vietnam's proven South China Sea Article 1 Page 2 of 14
3 assets at 25 trillion cubic feet of natural gas and 4.4 billion barrels of oil. In 2011, by contrast, Vietnam's hydrocarbon reserves totalled only 6.8 trillion cubic feet of gas and 0.6 billion barrels of oil. The US EIA attributes this significant expansion to "successful" offshore exploration. As Vietnam's waters "remain largely underexplored", ongoing exploration could further increase the country's assets, adds the agency. Airbus Defence and Space imagery dated 20 September 2015 shows China's ongoing development of the artificial island created at Fiery Cross Reef in the South China Sea. Fiery Cross is Beijing's largest base in the Spratly Islands. ( CNES 2015, Distribution Airbus DS/2015 IHS) White Paper Determining the scope of the Chinese threat and Vietnam's response will be a primary task of the new White Paper. Originally to be published in December 2014, the policy document was postponed until after the National Congress to ensure defence aligns with other key policies. There is no scheduled date for its publication but it is now expected before the end of While Vietnam will be wary of provoking China, the White Paper is expected to outline a requirement to respond to growing regional tensions, said Thayer. "Vietnam needs to protect its assets in the South China Sea and it needs to pose a risk to Chinese naval vessels," he said. "The White Paper has to reflect its Article 1 Page 3 of 14
4 challenges, but Vietnam will not be able to come out and identify China. Instead it will make reference to hotspots in the South China Sea." Chinese (left) and Vietnamese coastguard vessels sail in the waters claimed by both countries in the South China Sea on 15 May China's deployment of an oil rig off Vietnam's coast in early May prompted a tense sea standoff between the two neighbours. (PA) When announcing a plan to release the White Paper before the end of 2014, prior to its publication being postponed, Vietnamese defence minister Phung Quang Thanh clearly referred to China's land reclamation. He also apparently set a requirement for the White Paper to promote the resolution of any dispute through the non-binding Declaration on the Conduct of Parties in the South China Sea (DoC) policy. Signed by China and the Association of Southeast Asian Nations (ASEAN) in 2002, the DoC seeks to promote cooperation between the two parties. "Our view is to adhere to the [DoC]," said Thanh. "The claimants of the Spratly Islands should not expand the construction or present improper claims against international law. The CPV has determined to protect sovereignty by using peaceful means, and Vietnam will join signatories of the DoC to comply with commitments." Article 1 Page 4 of 14
5 Collaboration Ho Chi Minh City (HQ 183), the second of six Russian-built Improved Project 636 'Kilo'-class diesel-electric submarines, was commissioned into service with the Vietnamese People's Navy in early April (PA) The 2016 White Paper will certainly cover efforts to strengthen collaborative ties with allies. This emerged from the 2009 White Paper as a key method to elevate Vietnam's strategic standing as it sought to integrate faster into global economic and diplomatic networks after years of relative isolation. Under the strategy Vietnam has gradually moved closer to Western governments, gaining powerful allies that could prove important in any major dispute with China. The collaboration strategy also has implications for Vietnam's military procurement decisions and its related efforts to spur defence industrial development. The significance of the link between defence trade and related industrial activities was underlined recently by US defence secretary Ashton Carter. The US eased its long-standing military embargo on Vietnam in November 2014, allowing Hanoi to procure US-made maritime security-related equipment. In a visit to Vietnam in June 2015 Carter signed with Thanh a 'joint vision statement on defence relations' that provides a framework for anticipated defence trade as well as potential industrial collaboration. "Our countries are now committed for the first time to operate together, step up our defence trade, and to work toward co-production," said Carter. While military sales to and defence industrial relations with Vietnam enhance US influence in the Asia- Pacific region, these confer equally important benefits on Vietnam. As in other Southeast Asian countries - notably Indonesia and Myanmar - developing defence-industrial skills has become a key issue in Vietnam, described in the 11th National Congress in January 2011 as one of Article 1 Page 5 of 14
6 five national priorities (along with economic growth, education, political structures, and the CPV). Vietnam reasons, like other countries with similar priorities, that a strong defence industry will not only ensure a supply of capability to its military but also spur wider economic development. Vietnam's efforts to build industrial capability are channelled through investment in indigenous research and development (R&D) programmes and collaborations between Vietnamese industry and foreign primes. While limited industrial capability has tended to restrict Vietnam's involvement to less sophisticated programmes, recent years have apparently brought progress. Procurement Vietnam's emphasis on collaboration and its requirement to seek a variety of allies is gradually altering its defence procurement preferences. A shift away from Russia, its primary supplier, is evident as Vietnam looks for partnerships that not only facilitate cost-effective acquisitions but also support industrial development through technology transfers. Vietnam ordered 12 additional Sukhoi Su-30MK2 aircraft from Russia in The country's air force is estimated to operate a total of 30 Su-30MK2s. (PA) As of 2015, however, Russia remains by far the most prominent supplier of defence equipment to Vietnam. Major deals in recent years include orders of 'Kilo'-class submarines as well as Sukhoi Su-30MK2 fighter aircraft, Svetlyak-class (Project ) fast attack craft, Gepard 3.9 (Project 11661) light frigates, and Tarantul V (Project ) corvettes. Vietnam's suppliers have also traditionally included some East European countries - particularly Poland, Ukraine, and the Czech Republic - that have helped it operate Article 1 Page 6 of 14
7 Russian and Soviet-era systems. China is also a supplier, again providing parts to support Soviet systems, particularly tanks. Newer defence trade partners have included Canada, Israel, and some West European nations, particularly France, Spain, and the Netherlands. This growing preference for European equipment has been underlined by Vietnam's orders of Airbus C295 transport aircraft, C transport aircraft, and EC225 maritime patrol helicopters. The US move to ease sanctions to allow sales of maritime security equipment is also likely to spur defence trade between the two countries. Vietnam's first US purchase was announced in early 2015 and, at a cost of USD18 million, features six Metal Shark-produced Defiant 75 fast patrol vessels for the Vietnam Coast Guard. The boats will be delivered unarmed, although Vietnam retains an option to later upgrade them. Vietnam has ordered four Russian-designed Gepard light frigates for its navy, although additional units are expected. (Zelenodolsk Shipyard) Other US maritime-related platforms Vietnam is thought to be eyeing include Lockheed P-3 Orion maritime patrol aircraft and Raytheon coastal radar systems. Options for co-production are likely to feature patrol boats or UAVs. Modernisation Vietnam's strategic requirements mean its procurement priority is boosting the capability of its air force. Minimal procurement activity is projected in the near term for the land forces, while the navy looks set to continue a relatively large-scale recapitalisation, particularly of its vessels. The Vietnam People's Air Force and Air Defence operates a number of obsolescent aircraft, with many at or near the end of their serviceable life. The air force can therefore provide only a limited air superiority role yet credible support for land and naval forces. Article 1 Page 7 of 14
8 Vietnam's air force has recently boosted its transport fleet with an order in 2013 for three Airbus C295 aircraft. (Airbus DS) Combat capability rests with about six Su-27SKs acquired in the 1990s, an estimated 30 Su-30MK2s delivered from 2004, about 50 Su-22M3/M4s, and severely depleted fleets of MiG-21s, about 100 of which were delivered in the late 1970s. Given Russia's dominance and its flexibility in relation to repayment, Vietnam will almost certainly seek to acquire additional air combat capability from Moscow. Rumours in Hanoi suggest Vietnam will look to acquire the Su-35, which in September was selected by neighbouring Indonesia to meet its fighter requirement. The air force has recently boosted its transport fleet with the order in 2013 of three Airbus C295 transport aircraft, although its logistics capability remains limited, with only about 12 Antonov An-26 aircraft in operation. Its rotary-wing capabilities are similarly restricted, with fleets featuring Mil Mi-24 attack helicopters and Mil Mi-8/17 utility helicopters delivered in the 1970s. The air force also has limited C4ISR capabilities and lacks airborne early warning aircraft. Copyright IHS Global Limited, 2015 Article 1 Page 8 of 14
9 For the full version and more content: IHS Jane's Defence Industry and Markets Intelligence Centre This analysis is taken from IHS Jane s Defence Industry & Markets Intelligence Centre, which provides world-leading analysis of commercial, industrial and technological defence developments, budget and programme forecasts, and insight into new and emerging defence markets around the world. IHS defence industry and markets news and analysis is also available within IHS Jane s Defence Weekly. To learn more and to subscribe to IHS Jane s Defence Weekly online, offline or print visit For advertising solutions contact the IHS Jane s Advertising team Article 1 Page 9 of 14
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