Limited domestic defense capabilities drive the country’s defense imports

Tuesday 3 July 2012, Amsterdam

Taiwanese defense expenditure, estimated to be US$10.72 bn in 2012, registered a CAGR of 0.65% during the review period (2007-2011) and is expected to grow at a CAGR of 7.01% during the forecast period (2012-2017), to reach an estimated US$14.05 bn in 2016. As well as overall military spending, defense expenditure as a percentage of GDP is also forecast to increase, from 2.04% in 2012 to 2.16% in 2016. Overall, the country is expected to spend an estimated US$61.626 bn on its armed forces during the forecast period, of which approximately US$6.9 bn will be allocated for capital expenditure (see graph).

The growth of the Taiwanese defense industry is hampered by project delays associated with the global financial crisis, which have led to cost overruns and the cancellation of certain projects. Despite seeking to increase its defense budget to 3.0% of GDP, the country’s 2011 defense budget is estimated at just 2.0% of GDP, primarily due to the financial constraints faced by the country. As a result, certain acquisition programs have either been postponed or cancelled. All these factors discourage investors from entering the Taiwanese defense market.

According to existing regulations, domestically manufactured equipment can be sold in the international arms market, through either government-appointed or designated sales agents that participate in competitive bids or negotiate contracts through private arms dealers. However, a lack of sales agents makes it difficult for the country to cater to the global arms market. The country also established arms trading firm Taiwan Goal to promote domestic arms production, but it was dissolved when it was discovered that the country was involved in malpractice. A lack of exports restricts the growth of the domestic military industrial base.

Excessive corruption within the government’s procurement process hampers the entry of foreign investors into the country’s defense market. Some foreign investors have resorted to paying bribes in order to win a contract, which has discouraged foreign OEMs from entering the market. For example, in 1991 the French state-owned firm Elf Aquitaine was accused of paying bribes to Taiwanese government officials to win a contract for the sale of six Lafayette Class frigates.