Choppers Will Have to Battle it Out in Booming Asia
With a 14% increase in defense spending last year, Asia is rapidly becoming the target of companies in the aerospace and defense sector. In fact, the region is expected to become one of the largest markets for defense-related choppers worldwide by 2015.
The trend has already started as a number of Asian countries are set to place purchase orders which would together amount to a whopping $10 billion over the next three years -- an amount lucrative enough for three U.S. chopper manufacturers that will be competing for these orders, along with others from Russia and Europe.
The three U.S. chopper contenders in the fray include Boeing's (NYS: BA) Apache helicopters, Textron's (NYS: TXT) Bell, and United Technologies (NYS: UTX) -owned Sikorsky with its Seahawk choppers. Others are Eurocopter's NH90 and Russia's Mil Mi series of choppers.
Demand shifts away from the U.S.
Currently, the U.S. is the biggest buyer of military choppers, accounting for about 50% of global sales. However, U.S. and European suppliers are witnessing slowing demand from domestic markets on account of sluggish economic outlook and defense budget cuts. The defense suppliers are looking to capitalize on the surging Asian demand to offset weakness at home.
Continued economic growth, coupled with tensions in the Asia-Pacific region, is pushing the demand for defense products, including choppers. Rotorcrafts do not feature in the priority list of military requirements, and most of the Asian countries have deferred buying of new choppers for quite some time. The recent wave of demand from Asia only means that they have come to a point where they need to replace their aging fleet of military choppers. That is good news for the suppliers, but the competition is tough, and who walks away with the winner's trophy is yet to be seen.
While China, Malaysia, and Vietnam are also Asian hotspots, I found two countries that have a lot to offer to these suppliers: India and South Korea.
India order book
India is looking to buy naval, attack, and heavy-lift helicopters. The country needs 55 naval helicopters and can choose from Sikorsky's Seahawk, Textron's Bell 429, and Eurocopter's NH90 choppers. This deal is expected to be worth $2.2 billon.
India recently issued tenders for 22 combat helicopters and 15 heavy-lifting choppers. Boeing pitched its AH-64 Apache range against Russia's Mil Mi-28 Havoc for the combat helicopter category, and it's apparently favorably placed in the deal owing to its versatility and advanced technology. The deal is yet to be finalized. Further, there is a possibility that the country may extend this order to 44 helicopters.
For the heavy-lifting choppers, top contenders are Boeing's Chinook and Russia's Mi-26 Halo. Boeing's Chinook was used extensively in Afghanistan and is a tried and tested model. Thanks to its powerful contra-rotating tandem rotors, the Chinook is capable of literally standing still on a mountain or rooftop to drop or pick up personnel, which may make it the preferred choice by India for high-altitude combat.
These orders come on the foot of the $11 billion contract for 126 fighters provisionally awarded to Paris-based Dassault Aviation SA (AM)'s Rafale last month. The country expects to tender for supply of another 322 light helicopters combining the requirements of the Indian Air force (125) and Indian Army (197).
Attack helicopters are hotly in demand in South Korea, too. The country plans to buy 36 attack helicopters in a tender worth $1.5 billion. Fighting for this contract are Boeing's Apache, Textron's Bell Viper, and Eurocopter's Tiger. That does not mean South Korea has nothing to offer United Technologies. The country is expected to request proposals for its anti-submarine contract, which Sikorsky's Seahawk hopes to secure.
The Foolish bottom line
The ability to bag contracts will depend on the competitive edge of these companies -- with a pinch of politics, of course. I think this region could be a bright spot for defense contractors going forward.
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At the time this article was published Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Textron. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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