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CONTENTS PART A: FOREWORD PART B: OBJECTIVES OF THE BLUEPRINT PART C: STAKEHOLDERS OF THE BLUEPRINT PART D: INTRODUCTION : The Malaysian Defence Industry Strategic Analysis of The National Defence Industry The Competencies PART E: THRUST AREAS AND INITIATIVES PART F: SUMMARY OF THRUST STATEMENTS AND KEY INITIATIVES

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PART A FOREWORD

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PART B OBJECTIVES OF THE BLUEPRINT

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The Objectives of the Defence Industry Blueprint are: to provide an overview of the Malaysian Defence Industry; to provide guidelines for the development of local defence Industry; to identify strategic technology areas of focus to catalyse the defence industry development and capability building; and as a reference to all stakeholders of local defence industry.

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PART C STAKEHOLDERS OF THE BLUEPRINT

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The Defence Industry Blueprint comprise stakeholders under the following three classifications: 1. Key Players: Members of MDIC Malaysian Defence Industry Companies Ministry of Defence ( MINDEF), Malaysia The Malaysian Army The Royal Malaysian Air Force The Royal Malaysian Navy Ministry of Internal Security Royal Malaysian Police Department of Civil Defence Ministry of Home Affairs Department of Immigration Ministry of Housing and Local Government Malaysian Fire & Rescue Department Other Agencies Royal Customs Department 3. Interests Groups Original Equipment Manufacturers (OEM (OEMs) International Defence Contractors Research / Industry Analysts Foreign Governments 2. Supporting Players: Financial Institutions R&D Institutions Companies in Related and Supporting Industries Higher Education Institutions / Technical / Vocational Training Institutions

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PART D INTRODUCTION
1.0 BACKGROUND 2.0 THE MALAYSIAN DEFENCE INDUSTRY 3.0 STRATEGIC ANALYSIS OF THE NATIONAL DEFENCE INDUSTRY 4.0 THE COMPETENCIES

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1.0 Introduction

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Shaping the Defence Industry Competency Defence industry is a strategic component that forms an integral part in the development of the nations defence capability. A well developed defence industry contributes significantly to the availability of the state of the art technology, weapon systems and military solutions. It also provides through life support structures and services that have a bearing on the serviceability rate of the armed forces inventory. This has become more significant with the implementation of outsourcing and contractorisation. The role of the defence industry in maintaining, repairing, overhauling, upgrading and modernising military equipment has become increasingly significant. A well developed local defence industry reduces the nations reliance on foreign manufacturers and suppliers, hence building up national self dependence.

The contribution of defence industry to socioeconomic development of the country should also be recognised. Defence industry contributes towards the creation of employment opportunities, savings from foreign exchange, technology transfer, inward flow of foreign direct investments (FDIs) and dual use of technology. It also generates spin-offs to other sectors of economy. These in turn contribute to the economic well being as well as political stability of a country which is the essential ingredients of national security. The Government in the Eight Malaysian Plan Mid term report re-iterated the importance of the defence industry in creating value added activities as well as enhance the economic development of the country. Since the industry as a whole involves the manufacturing of products for use in aerospace, maritime, defence, automotive and ICT, therefore it provides vast opportunities in the area of technology development, skills enhancements and export. The spill over effects from these activities will accelerate the development of other supporting industries

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The development of the Malaysian defence industry started in the early 1970s when the nation embarked on the setting up of a government owned ordnance factory. This was then followed by the privatisation of the depot facilities of the Royal Malaysian Air Force and the Royal Malaysian Navy in the 1980s and 1990s. With the launching of the Industrial Master Plan in 1986, the industrial sector expanded significantly, contributing to the development of a broad industrial base, a necessary prerequisite for the development of the defence industry This development encouraged some companies engaged in the production of commercial goods to venture into defence sector . The defence industry received further impetus with the nations procurement of capital equipment in the 1990s and the implementation of the offsets policy, enabling the country to leverage on the procurement process to acquire technology. The Eight Malaysia Plan Mid Term Report emphasized the importance of offset arrangement as a strategy to obtain transfer of technology to upgrade and improve the local technology base as well as provide training and spin-offs for the local industry. The Government will review the whole approach of the offset programme with the aim of strengthening its framework and formulating guideline as well as determining appropriate process, structure and practices. However, on the whole, the development of the defence industry is still far from its true potential as compared to other leading sectors such as electronics, oil & gas and automotive. Malaysian defence industry today contributes to a growing supply of military assault rifles, small caliber ammunitions, aerial reconnaissance vehicle (ARV), patrol vessels, information and communications technology (ICT) based solutions and military gear and apparel. It has also developed capabilities to undertake activities in the area of maintenance, repair and overhaul, upgrades and modernisation in certain areas as well as the capability to manufacture parts and components for both local and foreign markets.

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Nevertheless, much remains to be done in enhancing indigenous defence capability. Various challenges stand in the way of accelerating the pace of growth for the defence industry. These include the lack of critical mass, high capital investment, lack of research and development, rigid specifications, lack of competencies, absence of uniformity and lack of promotional and marketing activities. Taking cognisance of these challenges as well as continued defence industry development initiatives and programmes, it is imperative that the nation formulates and put in place a national strategy that charts out the strategic direction and the way forward for the nations defence industry. As such, it is indeed timely a Defence Industry Blueprint be formulated to provide the strategic direction of the industry. Therefore, the intention of this document, is to look into the existing and future capabilities in order for the nation to be able to maintain its self reliance, self defence capability and full combat readiness, in any circumstances.

It is best to describe the competencies along the value chain for manufacturing and such components are listed as follows: Research and Development Design Manufacturing Assembly Integration Maintenance It is noted that the components of the value chain vary with the functions prescribed under the Ministry of Defence.

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1.1 Background 1.1.1 The Armed Forces The Malaysian Armed Forces comprise three core groups : The Malaysian Army The Royal Malaysian Navy The Royal Malaysian Airforce The functions and activities of these three core groups are supported by the Armed Forces Head Quarters. The functions and responsibilities of the Armed Forces are: To manage national defence; To implement the national defence policy and general government policies; To provide management and administrative service to the components of the Malaysian Armed Forces; and To manage resources allocated for national defence.
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Managing national defence is a costly affair to the nation as many key technologies and competencies are not readily available. It is the agenda of this blueprint to identify areas where technologies and hence competencies that can be developed in order for Malaysia to be a selfsustaining nation in defending her sovereignty. The development of local capabilities will ensure savings in terms of purchasing of new weapon systems and in the maintenance of the existing systems in the Armed Forces. Apart from savings, development of competencies may help the nation to overcome dependence on imports should sanctions and embargoes being imposed on Malaysia. A friend today may be a foe tomorrow. Initial investment towards building national defence capabilities is expensive. Nevertheless, such investment is necessary as building a strong and coherent national defence capability is of strategic importance to the nation.

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There are many ways to develop such capabilities and the Armed Forces have taken steps towards achieving such goals. Core competencies across the disciplines of the Armed Forces need to be identified, acquired, developed and strengthened. Investment in such competencies will eventually benefit the Armed Forces and the nation as a whole. Malaysian Armed Forces require the necessary military hardware and software in order to carry out its functions effectively. The need for some of these hardware and software may be similar among the three components of the Armed Forces. One of the main objectives of this Blueprint, is to identify the common competencies available from the acquisition of the military hardware and software across the three components of Armed Forces. This Blueprint will eventually identify products for the local industry to produce in compliance with Malaysian requirements and specifications. The objective for a return on investment may be secondary for selected strategic products however the competencies acquired can be extended to other civilian applications in order to strengthen the technical competencies of the nation. 1.1.2 Malaysian Defence Industry Council The Malaysian Defence Industry Council (MDIC) was formed in August 1999 to ensure the coordinated development of the defence industry in Malaysia. The Council, chaired by the Hon. Minister of Defence, consist of representatives from Ministry of Defence, Economic Planning Unit, Prime Ministers Department, Ministry of International Trade and Industry, Ministry of Finance, Ministry of Entrepreneur and Cooperative Development, Ministry of Home Affairs, MIGHT and local defence industry companies. The Functions of the MDIC are to:

steer and direct the orderly development of the defence industry taking into consideration the objectives of the Government as well as that of the nation as a whole; discuss common problems encountered by defence companies;and establish and maintain a grouping of national companies concerned with and interested in the defence industry in Malaysia.

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The Functions of the MDIC are to: assist in the promotion of the products and services developed by the local companies. disseminate information to defence companies regarding offsets and transfer of technology programme; facilitate the dissemination of information relating to export opportunities and assist defence companies in accessing foreign markets; assist and coordinate the presence and representation for defence companies at relevant overseas trade shows, promotions and marketing activities; act as clearing house for the exchange of information and to organise seminars on defence industry related issues;and develop and build upon working relationships with appropriate foreign defence industry organisations. 1.1.3 Development of the Blueprint The move towards the development of the Defence Industry Blueprint started a few years ago. This was then followed with the gathering of key players to a workshop on 10th to 12th October 2002 at the Regency Hotel and Resort, Port Dickson. This workshop was the first consultative workshop held for the development of the National Defence Industry Blueprint. The consultative workshop comprise players from industry, the Government Agencies and personnel of the Ministry of Defence. The recommendations made in this Blueprint are based upon extensive consultation between the major stakeholders in the defence industry. These consultations involved a wide spectrum of people with interest in the development of national defence capabilities for both military and civilian purposes.

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2.0 The Malaysian Defence Industry There is a need to coordinate the development of the local defence industry taking into consideration the needs of the Malaysian Defence Forces, the industry and the nation as a whole
Dato Dato Seri Mohd Najib Tun Abdul Razak Source: Bulletin Malaysia Defence Industry Council, October 2000

2.1 Outline In this section, members of the MDIC Taskforce reviewed the rationale for developing a defence industry, and also highlighted the importance of the defence industry towards defending the sovereignty of the nation. This section shall also identify the role of the key players in the development of the industry and the importance of sustaining the capability already available in the three components of the Malaysian Armed Forces.

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2.2 The Rationale for Developing the Defence Industry Currently, the industry lacks critical mass to encourage diversification of markets and users to support the export initiatives of the defence industry. A relatively high capital investment is required for the development of the defence industry. In order to reduce the high capital investment, a planned distribution of work may reduce the burden of high investment on the chosen main contractors.

2.2.1 Reducing The Balance of Payment Military products and services of the Malaysian Armed Forces are numerous in types and of varied specifications. The quantum for each product and service do not justify the production capacity of profit margin for local companies. As a result, Malaysia has to import such products and services hence, contributing to high import bills on defence. One way of reducing the balance of payment is to create certain capabilities and the production of major parts in the country. Malaysia must at least be able to overhaul and maintain the military equipment procured.

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2.2.2 Employment Opportunities The development of the defence industry means development in three (3) different applications; mainly applications for land, sea and air. These applications tend to employ people in various disciplines and skills, thus creating business activities and employment opportunities principally for skilled and semi-skilled workers. Retired military personnel can also be absorbed into the industry. 2.2.3 Technology Gateway/Spin-Off Benefits Defence industry houses the most complex core technologies which have potential applications in other industries. The technological competencies developed in the whole spectrum of the value chain shall be extended for use in other industries. This provides opportunity for the universities, skill development centres and industries to work hand in hand in promoting new technologies and skills especially for the use in the maintenance programme of the military hardware and products. The development of competencies shall ensure a certain degree of technological sustainability for the nation, military might to be maintained on a regular basis and to ensure its combat capability in times of need. This will also enable the armed forces to have all military equipment to be maintained on regular basis by a competent and capable local defence industry.
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2.2.3 Technology Gateway/Spin-Off Benefits contd

The government must take the lead and identify companies that can carry out certain products/hardware utilising local R & D capability in collaboration with foreign parties. Companies will have to continuously nurtured and monitored until the product is successfully produced. There may be export potential that can be realised with government support and funding. The product can therefore be continuously improved. A good example is the experience of South Korea. Many companies are now hardware / product exporter in the defence sector. Their success story can be emulated by local companies with the Governments assistance. Therefore, the spirit / slogan Malaysia Boleh can be realised with full commitment from both parties, i.e the Government and the private sector. We have to be bold and aggressive to realised the vision.

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2.2.4 Revenue Generation The return on investment for military hardware and systems purchased is expected to be low unless steps are being taken to add value for such hardware and systems. Since this is the scenario, it is imperative for the defence industry to take a different approach in tackling the issue on the return of investment made for the military hardware and systems purchased. The revenue generated may not be obtained directly from the technology developed and the selling of the hardware. Nevertheless, the return on investment can be expected from the development of competencies and extension of such competencies for application in the spin-off industries. 2.2.5 Security The ability to maintain our own military hardware and software will enable us to sustain our defence deterrent capabilities. This should greatly enhance our independence in areas such as military intelligence and HiTech defensive capabilities.

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2.3 The Malaysian Defence Industry - Critical Issues

2.3.1 National Defence Policy The national defence philosophy advocates the sustenance of national defence through directing of all national resources available. This indicates the need to build up capabilities to sustain own equipment and weaponry for engaging intruders into the Malaysian territories. Apart from the philosophy mentioned, the National defence policy is based upon the three main fundamental elements, namely self-reliance, total defence and international cooperation. The build-up of defence capabilities very much depend on policies as stated in New Economic Policy, The Second Industrial Master Plan, The National Defence Policy and the Policy on Privatisation and Contractorisation. It is the objective of this Blueprint to enhance the national defence policy in implementing the the selfreliance elements into the Malaysian defence.

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2.3.2 Dependence on Foreign OEMs The current military hardware and software are very much depended upon foreign Original Equipment Manufacturers (OEMs). There is a need to develop an efficient technology management programme in the long run. This is to reduce the cost of developing the technological capability without compromising on technological superiority.

2.3.3 Limited Defence Budget The development of military superiority is an expensive exercise. During the financial crisis that hit the region in 1997, major cutbacks in defence expenditure hampered the growth of the industry. However, the global uncertainties since the September 11 tragedy has generated greater interest towards enhancing national security. Defence budget is mostly allocated for the purchase of military hardware but little is being allocated towards the development of the technology locally. As a result, the companies involved in the development of military technology do not have the economy of scale to sustain further growth in the technology that they are already involved in. This leads to the non-retention of resources and dedicated players for the defence industry. Specific research and development grants channelled through STRIDE and selected companies with research and development facilities would go along way in alleviating the problem.

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2.3.4 Small Domestic Market Due to our small population of 22 million and with a relatively small land covering a total area of 329,758 sq. km, the local defence industry players do not enjoy the luxury of a strong local base to market the products on a large scale. So there is a need to export these products to the global market and compete with international players right from the start. Perhaps Malaysia should be a leading manufacturer for nations in the South-South Cooperation and as OEMs for the more renowned international players. 2.3.5 Late Entry The development of the defence industry in Malaysia is still at the nascent stage compared to some of our neighbouring countries. Singapore, which began its expansion drive in the early 80s, currently has the largest maintenance, repair and overhaul (MRO) facilities in the Asia-Pacific region. Nevertheless, this should not be seen as a problem, but seen as an opportunity to look at the area of MRO. With the introduction of various equipment from non-traditional western suppliers, Malaysia can now position itself for a niche market.

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2.3.6 Constant Threat Southeast Asias security dynamics, rather than getting simplified in the post-Cold War era, have become more complex and multifaceted. Regional peace, security and stability has always been a priority to ASEAN countries. The self reliance defence capability is an important concept in the development of the defence capability of the ASEAN countries. The ASEAN countries, despite the regional security and stability has to be wary of the threat of terrorism and aggressive acts in the wake of globalisation and unipolarity. With the advent of technology and increased sophistication of weaponry and systems, the terrorists now are better equipped with state of the art weaponry and combat systems. Hence, it is imperative for the countries in the region to harness and capitalise on advanced technologies in developing and strengthening their defence capabilities and systems to deter the threat of terrorism and other aggressive acts. The ASEAN countries must also continue to strengthen the existing cooperation in the defence area for sustainable regional stability and peace.

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2.3.7 Human Resource Development In terms of manpower resources, there approximately 100,000 personnel in the Malaysian Armed Forces. Malaysia is in the process of filling in the occupational gaps in its industrial sectors. Roles played by training institutes, companies and government agencies are critical towards the development of skilled manpower in strategic areas with potentials in the upgrading of Malaysian military capability. Such capabilities, with clearly defined and structured programmes, will catapult the defence industry into new heights. Thus the need to increase defence competencies among the armed forces personnel through programmes that are clearly defined, has become increasingly important. 2.3.8 Supporting Industries The role of both supporting industries and government is to provide a conducive business environment for the development of the defence industry. In terms of regulatory aspects, Malaysia has still a long way to go before it can become a serious contender in the global defence market. There is a need to promote standardization and interoperability among the products so as to enable the vendor to cater certain parts of the products used in the army, navy and air force.
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2.3.9

Infrastructure

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Supporting infrastructure such as materials technology development and research institutes focus on defence products and technology are still lacking in Malaysia. There is a need to accelerate and develop the capability in producing strategic materials. Malaysia needs to blend with foreign expertise for further development in technological competencies and this needs to be looked into closely during the purchase of new military equipment. This can be achieved through close monitoring of the offset programmes. Lack of standardization and interoperability exacerbates logistics and maintenance problems and hence inviting many players who finally require dependency on foreign experts and companies. 2.3.10 Newly Emerging Market Players

New competition from emerging defence industrial players which include but not limited to countries like India, Turkey, Taiwan, Korea, Singapore, Indonesia, Brazil and South Africa will have sights towards countries which still depend so much on third countries in order to refurbish and maintain their military equipment. In most of these countries, the defence industries are being nurtured through strategic defence policies and implementation programmes.
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2.4 Key Players The key players in the defence industry can be categorised according to the sub- sectors as follows: a) Aerospace b) Maritime c) Automotive d) Weapon and Ammunition Systems e) Information and Communications Technology f) Common user The list of the key players according to the six sub-sectors above are as in Appendix.

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3.0 STRATEGIC ANALYSIS OF THE NATIONAL DEFENCE INDUSTRY Outline

3.2

Competitive Analysis ..(contd)

3.1

This section analyzes the competitiveness on the broad defence industry activities using the Porters Diamond Model. 3.2 Competitive Analysis

In order to address this situation, we must identify the key issues faced by the local players and the government in upgrading the nations competitive advantage in the defence industry. 3.3 Determinants of National Competitive Advantage

The defence industry is very much dependent upon the requirements of the individual nations and the geographical terrain of the nation. Based on the needs of these individual countries, the global defence industry has grown and is now not limited to the superpowers of the West. A few developing nations have developed the capabilities to produce the necessary defence equipments and able to sell them to nations which may need them. In spite of the above, certain quarters of the Malaysian defence industry capabilities have been promoted to the international market. Apart from that, the nation imports almost all military requirements from the West and Russia.

Using Michael E. Porters Dynamic Diamond, a SWOT analysis is carried out by examining attributes for the industry as a whole which Malaysia intends to embark on. The four corners of the diamond represent the determinants or attributes which are necessary for achieving and sustaining competitive advantage in knowledge intensive industries that form the backbone of the advanced economies of today. These are outlined as follows.

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3.3.1

Factor Conditions

3.3.3

Related and Supporting Industries

Factor conditions refer to the nations ability to deliver on factors of production such as skilled labour and the relevant infrastructure deemed necessary to compete in any given industry. Malaysia possesses an adequate supply of highly-skilled labour and excellent infrastructure to support the defence industry. 3.3.2 Demand Conditions

These refer to the presence or absence of suppliers and related industries that are internationally competitive in the nation. Industrialisation in Malaysia has resulted in activities that may be relevant to in the defence industry. There are various similar products & services that can be provided by the non-military manufacturers towards strengthening the development of the defence industry. 3.3.4 Firm Strategy, Structure and Rivalry

These refer to the nature of demand (domestic and international) for the industrys products or services. Though Malaysia herself offers a very small market, the developing countries should be viewed as the potential market for Malaysias defence products and services.

These refer to the conditions in the nation governing how companies are created, organised and managed. It also takes into account the nature of domestic rivalry. These determinants, both individually and collectively, provide the contextual structure within which companies are created and compete for available resources and skills towards achieving a competitive advantage in any given industry.

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3.4

The Defence Industry The need to have a 10 defence industry. years Blueprint for the

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It is the vision of the Malaysian Government to have an efficient and innovative defence industry to support a knowledge driven Malaysian Armed Forces in fighting and winning. In order to achieve such a vision, there is a strong need to develop an indigenous knowledge based defence industry to support the Malaysian Armed Forces. The objective of achieving this vision is driven by three (3) key defence policy attributes, namely To develop and enhance the local defence industrial capabilities; To achieve self-reliance in defence technology;and To prepare for global competition in selected niche areas. It is identified that in order to enhance the capabilities of the indigenous defence competencies, the Malaysian Armed Forces needs to have the following criteria:

Upgrading of Local companies to be Prime Contractors instead of Foreign Contractors for Defence Equipment Purchase Preferential treatment to be given to the local companies Future requirements of the Armed Forces must be acquired with the incorporation towards the development of capabilities of the defence industry The Defence Industry Blueprint needs to be incorporated into the coming Malaysian Industrial Master Plan (IMP) and the Five Year Development Plan The need to develop policy guidelines on the demarcation line for the involvement of local defence industry in specific areas Accelerate the pace of the enhancement by Increasing the local content Offset and technology acquisition Smart partnership with technology provider The need to link the defence industry with the general industry to cater for both the military and commercial clients

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3.5

The Defence Facilities Requirements

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The defence facilities requirements are as shown in Figure 3.1. The requirements are very much based upon the functions of the Malaysian Armed Forces. As illustrated in Fig. 3.1, the types of platform to carry the weapons are mainly the land, sea and air types. ICT is used to integrate the systems used for the land, sea and air weapons and vehicles whilst logistics form an essential support for all the three divisions of the Armed Forces. The products under the 6 sub-sectors of the defence industry may then be broken down into the roles and types that they play in the battlefield. The analysis conducted is on the overall defence industry requirements and not looking into each sub-sector defined in the divisions of the Malaysian Armed Forces.

Fig 3.1

Classification of Defence Facilities Needs


Light Arm Missile Systems Frigates Logistic

Artillery Systems

Korvet

Figthers VIP Trans Training Recognition Unmanned Logistic SAR Medic Costume Fixed Wing Rotary Wing Defence Facilities Needs

Assault Boat OPV Carrier Sub Marine C4I Armoured Bridging and Recovery Logistic and Transportation

Fuel Storage Food & Beverage

C4I

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3.6 A Competitive Analysis of The Defence Industry

It is important to apply this competitive analysis model on the defence industry on the whole. At this juncture, it is not possible to look into sub-sectors and perhaps this will be looked into closely in the future. The nature of the products may be applied in some of the sub-sectors identified in the Second Industrial Master Plan. This can also be examined in detail later. The competitive analysis is carried out on the basis of evaluating Strengths, Weaknesses, Opportunities and Threats (SWOT) of the various elements/attributes which determine the competitive advantage of a nation in a particular industry (with reference to Porters Diamond). These elements, to reiterate, are Factor Conditions, Demand Conditions, Firm Strategy, Structure and Rivalry and Related and Supporting Activities.

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3.6.1

The Defence Industry Competitive Framework - (Based on Blueprint Workshop Report) Strengths Weaknesses
Lack of capital Dependent on foreign product/technology Human resource not focus on defence Dependent on foreign expertise Perceived lack of confidence by the user

36

Opportunities
Trained retired military personnel SMIs not fully utilised Knowledge workers growing in numbers Increasing number of graduate in technology Increase offset requirements Increase local content Greater demand of competitive products for Developing Countries

Threats
Consolidation of international defence company Low retention of resources and expertise Globalisation Pace of technology Export restriction Condition imposed by critical component suppliers

Factor Conditions

Human Resource Development in place Adaptable and resourceful work force Infrastructure ready

Demand Conditions

Poor negotiation skills and 5+5 Contractorisation Policy Lack of clear policies to strategy protect LDI Good standing of Malaysia Fragmented Lack of unified direction Lack of clear policies on Competition with foreign defence industry companies Lack of clear definition of AFTA LDI Company Preference for foreign Inadequate policy to protect products interest of LDI LDI involved at tail end of procurement exercise No defined R&D grants Internal security does not patronise LDI Foreign perception on Malaysia Acquiring proper Transfer of Technology Strength in other sectors Fragmented Expanding local defence No dedicated players Related and such as oil palm, industry Infancy stage AFTA / Liberalisation Supporting automotive, electronics and More sub-contracting Too small in size Cheaper sub-contracting Industries ICT canpublication support the defence All rights reserved; no part of this may be reproduced, stored in a retrieval system,opportunities or transmitted in any form or by any sources Lack of R&D industry means,electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of Defence Industry Division, Ministry Lack of capital

Firm Strategy, Structure, and Rivalry

Increasing defence budget Increase in fleet size Some export quality products and services Increasing global uncertainties Good networking and promoting capabilities Visionary Government

of Defence, Malaysia

3.7

Observations - Based On SWOT Specifications should reflect local conditions and should not follow NATO etc STRIDE should develop appropriate specifications suitable for local conditions Identify sectors, areas and levels of capabilities Establish database for local industries and conduct auditing to establish thorough capabilities and performances Networking between LDIs Incentives for LDIs Import duties exemption for LDI on equipment / spares to support defence needs Government agencies should assist LDIs to get certification for export Pioneer status - special consideration for LDIs Government to give support to sustain LDI in economic crisis Close cooperation between user, administrator and LDI in determining requirements and providing support Use procurement as leverage to get industry to improve

37

Based on the analysis, it can be observed that there are challenges that needs to be addressed in developing a strong local defence industry. These challenges include:

High Capital Investment / Lack of Investment Investment does not guarantee return due to absence of long term commitment on procurement programme Lack of support from government agencies There is a need for a close cooperation between industry and government agencies so that industry can match its growth/investment to the needs of the country Government to facilitate to resolve conflicts between agents, Local Defence Industry (LDIs) and OEMs Tender award Preferences not given to Local Defence Industry Selection process not transparent Fair competition Specification based on specific equipment rather than functional requirement

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3.7

Observations - Based On SWOT ..(contd) Improve offset management Improve procurement procedures (see Figure 3.2) Government should conduct R&D to establish the multi use of common items and not depend entirely on OEMs

38

Increase Industrial Linkages LDI should complement each other rather than compete Enhance the skills to meet the need of self reliance True Local engineering Content, not screw driver

Joint development to reduce cost

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3.8

Current National Procurement Process

39

The current national procurement process could be further improved by bringing the industry much earlier on to the procurement process. This will enable the local industry to understand the requirements and proposed a more cost effective and sustainable approach to fullfill the needs of the Armed Forces There is an urgent need to re-examine the current procurement process in order to have effective participation of the local defence industry players in it. To further encourage the development of local initiatives, it is proposed a Prototyping Stage is to be included in the National Procurement Process. This is meant to allow a local defence industry to develop a prototype to a requirement of the Malaysian Armed Forces for evaluation purposes. In this manner, the local defence industry is in a better position to assess the appropriate technology transfer required as well as making better estimates of the contract value.

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40
Figure Figure 3.2 3.2 Current Current National National procurement procurement process process flow flow

Determine Allocation Prepare Specifications Determine Type of Tender Bumiputera Open Tender Limited Tender Get Treasury Approval Prepare Tender Documents Direct Negotiation

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Figure Figure 3.2 3.2 National National procurement procurement process process flow flow contd contd A

41

Advertise Open Tender Evaluate Tender Prepare Tender Briefs Tender Board Consideration Below RM7 million, decided by Procurement Board Non-Unanimous deliberation of more than RM7 million documented for Treasury approval Treasury inform agency of decision Implement Decision
B
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Figure Figure 3.2 3.2 National National procurement procurement process process flow flow contd contd

42

If need to negotiate, issue Letter of Intent Negotiation Stage Issue Letter of Acceptance if offer is accepted Contractor returning Letter of Acceptance Prepare Contract Document Sign Contract Document Monitoring/Payment of Contract
Source: National Procurement Guide Book, Ministry of Finance, Malaysia

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Figure Figure 3.3 3.3 Proposed Proposed Defence Defence procurement procurement process process flow flow

43

NATIONAL NATIONAL OBJECTIVE OBJECTIVE DEFENCE DEFENCE POLICY POLICY SELF-RELIANCE SELF-RELIANCE MKN MKN MINDEF MINDEF MALAYSIAN MALAYSIAN DEFENCE DEFENCE INDUSTRY INDUSTRY COUNCIL COUNCIL ARMED ARMED FORCES FORCES + + DEFENCE DEFENCE INDUSTRY INDUSTRY Identify offfset / leveraging & local content to develop local defence industries

SPECIFICATION SPECIFICATION

TENDER TENDER

Source : Local Defence Industry Blueprint Workshop Report, Regency Hotel & Resort, Port Dickson, 10-12 October 2002 Defenece

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44
Figure Figure 3.3 3.3 Proposed Proposed Defence Defence procurement procurement process process flow flow

Inputs from Local Industry Local Product Local content Technology transfer Work share Sub contract Offsets

TENDER TENDER SPECIFICATION SPECIFICATION

User Functional Specifications Operational Requirements Quantity

TENDER TENDER

AWARD AWARD

DELIVERY DELIVERY

AUDIT AUDIT

Source : Local Defence Industry Blueprint Workshop Report, Regency Hotel & Resort, Port Dickson, 10-12 October 2002 Defenece

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45

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4.1

Competencies Requirements

46

In order to enhance competencies for the sustenance of Malaysias military capability in conflicts, objectives need to be defined. The requirements of the Malaysian Armed Forces are as depicted in Figure 4.1. The Malaysian Armed Forces defence requirements such as systems, weaponry and other products and services are mostly met by foreign supplies. The situation is more apparent if we breakdown the competencies further. It can be further broken down to look in depth of the competencies available in the country. This will then indicate the competencies that need to be developed in order to produce Made-InMalaysia products and services.

Since the products used by the Malaysian Armed Forces are varied in nature and coming from various technologies, it is logical to look into the maintenance of these products and hence developing the technological competencies in-house for the available products. This is derived from the objective of the defence industry for the 10 year period. The experience gained from the maintenance can be put into use for the development of new products for the defence industries.

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Figure Figure 4.1 4.1 The The National National Defence Defence Requirement Requirement International Defence Demands & Needs

47

National Defence Demands and Needs

LOCAL PLAYERS
Product Provider Research & Development Design Manufacturer Assembler Maintenance Integrator Weapons and Ammunition Missile Systems Light Arms Launchers Artillery Systems Ammunition Aerospace Fixed Wing fighters & bombers interceptors transport and logistics reconnaissance Rotary Wing helicopters Unmanned Aircraft Vehicles (UAV) Maritime Assault Boats Rafts Hovercrafts OPV / MPV Corvettes Frigates Carriers Submarines Minesweepers Survey vessels Automotive Armoured Vehicles Soft-Skin Vehicles Specialist Vehicles Heavy Machinery Vehicles ICT Command Control Communication Co-ordination Intelligence and Reconnaissance Platform management system Software development/ Customisation Services Provider Planning Analysis Design Installation Integrator Common User Apparels and Gears Bio-Medic Food & Beverages Storage Fuels Parachutes

Defence Industry Needs


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COMPETENCIES IN MALAYSIAN DEFENCE INDUSTRY (COMPETENCY MATRIX)

Maritime
Element R&D

48

SURFACE COMBATANT - PLATFORM


DESIGN MANUFACTURING MAINTENANCE INTEGRATION ASSEMBLY

Item
Current 2010 L L-M S N N-L S L L-M S L L-M S L L-M S N N-S S N N-L S L L-M S L L-M S L L-M S
M-Medium H-High

H H H N N-L S L L-M S L L-M S L L-M S


N/A -Not Available

H H H M M-S S H H H S S-H H S S-H H

N/A N/A N/A L L-M S S S-H H S S-H H L L-M S

N/A N/A N/A M M-S S S S-H H S S-H H L L-M S

Structure Propulsion System Electrical System

2020 Current 2010 2020 Current 2010 2020 Current 2010

Auxiliary

2020 Current 2010

IPMS
* Note: N-None

2020
L-Low

S-Sufficient

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Maritime ( contd)
(SURFACE COMBATANT-COMBAT SUITE)
Element R&D DESIGN MANUFACTURING MAINTENANCE INTEGRATION ASSEMBLY

49

Item
Integrated Navigation System Integrated Communication System
Current 2010 2020 Current 2010 2020 Current N N-L S N N-L S N N-L M N N-L M N N-L S N N-L S N N-L S N N-L M N N-L M N N-L S
M-Medium H-High

N N-L S N N-L S N N-L M N N-L M N N-L S


N/A-Not Available

M M-S H M M-S H L L-M H M M S L L-M S

L L-M S L L-M S L L-M S L L-M S L L-M S

L L-M S L L-M S L L-M S M M S N N-L S

Weapons Fire Control System

2010 2020 Current 2010

Weapons

2020 Current

Electronic Warfare
Note: N-None L-Low

2010 2020

S-Sufficient

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Maritime ( contd)
(SUBMARINE-PLATFORM)
Element R&D DESIGN
MANUFACTURING MAINTENANCE INTEGRATION ASSEMBLY

50

Item
Current 2010 N L N L N L L M N/A N/A N/A N/A

Structure Propulsion System Electrical System

2020 Current 2010 2020 Current 2010 2020 Current 2010

L M

L M

L M

M S

L M

L M

M M

M M

M M

S S

S S

S S

M S

M S

M S

S S

S S

S S

Auxiliary

2020 Current 2010

M S

M S

M S

S S

M M

M M

IPMS
* Note: N-None

2020

L-Low

S-Sufficient

M-Medium

H-High

N/A-Not Available

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Maritime ( contd)
51

(SUBMARINE-COMBAT SUITE)
Element R&D DESIGN MANUFACTURING MAINTENANCE INTEGRATION ASSEMBLY

Item Integrated Navigation System Integrated Communication System Weapons Fire Control System Periscope Sonar
Current 2010 2020 Current 2010 2020 Current 2010 2020 Current 2010 L M L M L L M M L M M M N L N L N L L M L M L M N M N M N M M M L M L M L M L M L M M M L M L M

Weapons

2020 Current

Electronic Warfare
Note: N-None L-Low

2010 2020

L M

L M
M-Medium H-High

L L

M M

M M

L M

S-Sufficient

N/A-Not Available

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Weapons & Ammunitions


52
Element Item Small Arm Weapon Medium Calibre Weapon/ Cannon/Mortar Large Calibre Cannon/Guns/ Mortar Fire Control System for Cannon/Guns Small Arm Ammunition
Current 2010 2020 Current 2010 2020 Current 2010 2020 Current 2010 2020 Current 2010 2020
Note: N-None L-Low

R&D

DESIGN

MANUFACTURING

ASSEMBLY

INTEGRATION

MAINTENANCE

REFURBISHMENT/ UPGRADE

L M S N L S N L S N L S L M S

L M S N L M N L S N L S L M S
M-Medium H-High

S H H N M S N L S N L S H H H
N/A-Not

S H H N S H L S H N L S H H H
Available

S H H N S H L S H N L S H H H

S H H M S H M H H L M H H H H

S H H M S H M H H L M H H H H

S-Sufficient

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Weapons & Ammunitions ( contd)


Element Item Medium Calibre Ammunition Current 2010 2020 Current Large Calibre Ammunition Components for Ammunition Guided Weapons System
Note: N-None Available

53

R&D

DESIGN

MANUFACTURING

ASSEMBLY

INTEGRATION

MAINTENANCE

REFURBISHMENT/ UPGRADE

N M S N M S L S M N L S

N M S N M S L S M N L S
M-Medium

L M S L M S M H H N L S
H-High N/A-Not

S H H S H H M H H N L S

S H H S H H M H H N L S

S H H S H H M H H L M H

S H H S H H M H H L M H

2010 2020 Current 2010 2020 Current 2010 2020


L-Low

S-Sufficient

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Automotive
Element

A VEHICLE (WHEELED + TRACK)


R&D system DESIGN system
MANUFACTURING MAINTENANCE INTEGRATION ASSEMBLY equipment

Item Power Train


Current 2010 2020

equipment

system equipment

54

system

N N N N N N N L M N L M N L M N N N

N N N N N N N L M N L M N L M N N N
M-Medium H-High

N N N N N N N L M N L M N L M N N N
N/A-Not Available

H H H H H H H H H H H H H H H H H H

H H H H H H M H H N/A N/A N/A N/A N/A N/A H H H

H H H H H H N L M N L M N L M H H H

Transmission

Current 2010 2020

Suspension

Current 2010 2020

Hull

Current 2010 2020

Track

Current 2010 2020

Turret

Current 2010 2020

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* Note: N-None

L-Low

S-Sufficient

Automotive
A VEHICLE (WHEELED + TRACK) ( .contd)
Elemen t R&D system Current N N N N L S N N N M M M N N N DESIG N system N N N N L S N N N N L L N N N
MANUFACTURING MAINTENANCE INTEGRATION ASSEMBLY equipment

55

Item Fire Control System


2010 2020 Current 2010

equipment N N N N L S N L M N N N N N N

system equipment L M M H H H H H H H H H M M S

system M M M H H H N/A N/A N/A M S H M H H

M M M H H H H H H H H H L M S

Weapon System

2020 Current 2010

Tyres / Wheel

2020 Current 2010

Communication

2020 Current 2010

Add On System
* Note: N-None L-Low

2020

S-Sufficient

M-Medium

H-High

N/A-Not Available

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Automotive
B VEHICLE
Element R&D system Current 2010 L M S L M M N L L M S H
M-Medium

56

DESIGN system L M S L M M N L L M S H
H-High

MANUFACTURING

MAINTENANCE

INTEGRATION

ASSEMBLY equipment

Item

equipment M S H N L M N N N M S H

system equipment H H H H H H H H H H H H

system N/A N/A N/A M S S H H H H H H

H H H H H H H H H H H H

Chassis

2020 Current 2010

Power

2020 Current 2010

Transmission

2020 Current 2010

Suspension
Note: N-None L-Low N/A-Not Available

2020
S-Sufficient

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Automotive
57

B VEHICLE ( .contd)
DESIG N system

Element

R&D system

MANUFACTURING

MAINTENANCE

INTEGRATION

ASSEMBLY equipment

Item Current Electronic / Electrical 2010 2020 Current 2010 Instrumentation 2020 Current 2010 Body 2020 Current 2010 Add On Systems
* Note: N-None L-Low

equipment

system equipment

system

M S H M S H H H H N/A N/A N/A

M S H M S H H H H N/A N/A N/A


H-High

M S H M S H H H H N/A N/A N/A


N/A-Not Available

H H H H H H H H H H H H

H H H H H H H H H H H H

H H H H H H H H H M S H

2020

S-Sufficient

M-Medium

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Aerospace
58

AIRCRAFT
Element Item Current 2010 L S M L S M L S M S M H L S M L S M N S M S M H
M-Medium

R&D

DESIGN

MANUFACTURING

MAINTENANCE

INTEGRATION

ASSEMBLY

L S M L S M N S S S M H
H-High

S M H S M H L M H S M H

L L M L L M L S M S M H

S S M L S M L S H S M H

Structure

2020 Current 2010

Avionics

2020 Current 2010 2020 Current 2010

Electronic Warfare

Simulator

2020

Note: N-None L-Low S-Sufficient N/A-Not Available

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Aerospace ( contd)
AIRCRAFT
59

Element

R&D L S S L S M L S M L S M

DESIGN L S S L S M L S M L S M

MANUFACTURING L S S L S M L S M L S M

MAINTENANCE S M H S M H M H H L M H

INTEGRATION L S M L S M M H M L S M

ASSEMBLY L S M L M M M M M L S M

Item Weapon Fire Control System


Current 2010 2020 Current 2010 2020 Current 2010 2020 Current 2010 2020

Electrical System Ground Support System Integrated Navigational System

Note: N-None L-Low S-Sufficient N/A-Not Available

M-Medium

H-High

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Aerospace ( contd)
60

GROUND ELECTRONIC DEFENSE SYSTEM


Element

R&D

DESIGN

MANUFACTURING

MAINTENANCE

INTEGRATION

ASSEMBLY

Item
Current L S M L S M L S M L S M L S M L S M L S M L S M
M-Medium H-High

L S M L S M L S M L S M
N/A-Not Available

S M H S M H S M H S M H

L M H L M H L M H L M H

L M H L M H L M H L M H

Radar System Radio System Navigational Aids

2010 2020 Current 2010 2020 Current 2010 2020 Current 2010

Auxiliary
* Note: N-None

2020
L-Low

S-Sufficient

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Aerospace ( contd)
SATELLITE
Element R&D DESIGN MANUFACTURING MAINTENANCE INTEGRATION ASSEMBLY

61

Item
Current 2010 L M M L M H L M M L S M L S M
S-Sufficient

L M H L M H L M M L S M L S M
M-Medium

N L M L S H N S M N L L L S M
H-High

N N N N N H N N N N N N L S M
N/A-Not Available

L S H L S H L S M L S M L S M

L S H L S H L S M L S M L S H

Structure Electrical system Control System

2020 Current 2010 2020 Current 2010 2020 Current 2010

Payload Bus/Platfor m
* Note: N-None

2020 Current 2010 2020


L-Low

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Information and Communication Technology (ICT)


62
Element Item Integrated Comms System Combat Managemen t System Current 2010 2020 Current 2010 2020 Current Electronic Warfare 2010 2020 Current 2010 IPMS 2020 Current 2010 Simulator 2020 R&D (system) L S H N M S L S H M H H N/A N/A N/A DESIGN (system) L S H N M S L S H M H H N/A N/A N/A
MANUFACTURING MAINTENANCE INTEGRATION ASSEMBLY

(equipment) N M M N L M N M M L M M N/A N/A N/A

(system equipment) M H H L S H L S H M H H N/A N/A N/A

(system) L S H L S H L S H M H H N/A N/A N/A

(equipment) L S H L S H L S H M H H N/A N/A N/A

* Note: N-None

L-Low

S-Sufficient

M-Medium

H-High

N/A-Not Available

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4.2

Current Available Competencies There is a lot of work need to be done to increase the capability of the Malaysian companies to produce defence products and services according to the required standards and specifications

63

From the summary of competencies available in the country, it looks as though the defence industry is ready to support the Malaysian Armed Forces. This situation portrays the general outlook of the competencies of the suppliers to the Ministry of Defence. It is an indication of capabilities available but upon closer look, most of these companies are basically manufacturers and assemblers of components. The capabilities portrayed in the summary are capabilities pertaining to the production of light aircraft, light patrol boats, light weapon systems. The capabilities to produce the final products are not readily available in the country for many defence product sectors. This is the reason why Malaysian companies are still dependent on foreign suppliers to provide the sub-components of major parts of the final product. Hence there is a need to do a micro study on the competencies of the products produced by Malaysian companies. From here, it is then possible to look at the competencies required to do heavy weight products, capable of defending the nation based on user requirements.

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4.3

Supporting Industry Requirements

64

The development of core industries depends heavily on the availability of supporting industries. The role of these supporting industries is to be the recipient of the outsourcing programme by the core industries. No single company can manufacture all items required in producing a product. In the development of the local defence industry, the core industries may come from the foreign suppliers. Nevertheless, the offset programme should go to the local supporting industries with close cooperation from the foreign suppliers. This is to promote the local supporting industries to become vendors for other markets. Close working relationship from the foreign suppliers is essential in ensuring the successful implementation of the offset programme by local supporting industries. As shown in Table 4.1 only 24% of the local supporting industries receiving the offset programme in 1990-2000 have completed the offsets.

Table 4.1 Offset Programmes


Total Number of Procurements From 1990 - 2000 Total Number of Offsets Generated Completed Unaccounted No response

30 230 55 81 94

Note : No response was due to companies having closed down, merge and unavailability of information
Source: Survey Response, Study on Offset Programme of the National Defence Procurement by MiGHT ( March 2002)

From Table 4.1, it can be inferred that the risk in the implementation of the offset programme by local companies could be mitigated through close linkages with foreign suppliers.

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Figure Figure 4.2 4.2 Supporting Supporting Industries Industries for for Defence Defence Products Products Electronics Electronics & & Electrical Electrical Industry Industry Telecommunication Telecommunication Industry Industry Petro-Chemical Industry LOGISTICS Natural Resources Based Industry Food Food Based Based Industry Industry Transport Transport Industry Industry

65

DEFENCE INDUSTRY

HUMAN RESOURCE

ICT
WEAPONS AEROSPACE AUTOMOTIVE MARITIME

COMMON USER

Education Education Industry: Industry: Formal Formal Non-Formal Non-Formal Training Training Institutes Institutes

Textile Textile & & Apparel Apparel Industry Industry Machinery Machinery & & Equipment Equipment Industry Industry Materials Materials Industry Industry

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66

PART E THRUST AREAS AND INITIATIVES

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5.0

Introduction Technology is strategic in developing a strong national defence. The ability to develop and deploy technology is critical for the Armed Forces. The industry must continue to upgrade technology either through R & D or Technology Acquisition / Transfer.

67

The primary purpose of the Blueprint is to guide the development of the Malaysian Defence Industry, into a strong and reliable economic sector that is able to provide strategic support in sustaining the defence capability of the nation at all times. Figure 5.1 illustrates the framework in developing the industry through this Blueprint. Five key thrust areas have been identified for the Blueprint.

Thrust Area 2 Technology Development

Thrust Area 1 Human Resource and Competency Development

This covers issues and actions related to the development of basic and strategic competencies for the industry. The primary factor required for competencies development is Human Resource. Human Resources Development is central towards competency development.

Thrust Area 3 Industry Development

Only with the available competency and technology, the Malaysian Defence Industry can grow. The Malaysian Armed Forces requirement cannot be established primarily for the development of the industry and at the expense of national security. It has to move in sync with each other. The industry must invest in the best to give the best to the nations defence forces.

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Thrust Area 4 Domestic Defence Procurement The National Defence Procurement Policy must provide greater avenue and preferences to local defence contractors in awarding the tender and local defence contractors to be allowed to be involved in determining major defence requirements. This will make it obligatory for OEMs to transfer related technology and capability to the local players. The local defence experience could be extended to other nations. Malaysian Defence Industry should tap on the global defence spending. This will provide a good base for the industry to develop its technology and business capability.

Thrust Area 5 International Marketing

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Figure 5.1

NATIONAL SELFRELIANCE

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STRONG LOCAL DEFENCE INDUSTRY

DOMESTIC DEFENCE PROCUREMENT

INDUSTRY DEVELOPMENT

INTERNATIONAL MARKETING

TECHNOLOGY DEVELOPMENT

HR & COMPETENCY DEVELOPMENT

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DRIVERS FOR GROWTH

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5.1 Issues and recommendations 5.1.3 Industry Development 5.1.1 Human Resource and Competency Development The issues related to Human Resource and Competency Development for the Defence Industry include: Lack of technical capabilities Lack of technologists & engineers in the Weapons and Systems; Lack of focus by human resource development on defence industry needs; Lack of knowledge workers in the defence industry; Lack of capitalization by Defence Industry on manpower potential from the pool of trained military personnel and trainable human resources. 5.1.2 Technology Development The issues on Technology Development are as follows: Lack of Research and Development Offset programme - level of technology transfer and capability development of local companies. No R& D grant allocated for Defence Industry Limited funding on research and development
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The issues related to Industry Development for the Defence Industry include: Fast pace of technological development - Local Defence Industry and support services are not in tandem with acquisition Small number of competent producers / manufacturers (generally still consumer based) Fragmented players / industry Lack of support from government agencies Insufficient vendor development Internal security does not patronise LDI No dedicated policy and direction to support development of LDI High capital investment Uncertain return on investments

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5.1.4 Domestic Defence Procurement The issues related to Domestic Defence Procurement include: Rigid specifications Over dependence on foreign OEMs Lack of standardisation Inadequate policy to protect interest of LDI 5 + 5 Contractorisation Lack of support for Defence Industry Development by procurement system. - LDI is at tail end of procurement exercise - Controlling of supply chain - supplies of spare parts are often given to agents 5.1.5 International Marketing The issues related to International Marketing include: Only some companies are able to export quality products and services. Competition - Open Market - Globalisation, AFTA - Regional players - Foreign companies - Government owned companies Poor negotiation skill and strategy
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5.2

Thrust areas and initiatives

From the FIVE thrust areas, key issues are identified for further action. Key initiatives are then established from the key issues that have been selected

5.2 5.2.1

Thrust areas and initiatives

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THRUST AREA 1 HUMAN RESOURCE AND COMPETENCY DEVELOPMENT ISSUE 1 The Malaysian Armed Forces has various categories of equipment that fall under the various sectors of IMP2. For example, defence transportation equipment has similarities in terms of applications and functions with the transportation equipment under the cluster of IMP2 which covers equipment for use on land, sea and air. With such similarities, it is possible to analyze and derive products, technology and competencies required for meeting the needs of the Malaysian Armed Forces. The competencies identified can be mapped along the manufacturing value chain and this will then facilitate the identification of lead players and the supporting industries for the production of such equipment. It is recommended that the offset programme for future acquisitions of defence equipment shall be based on competencies of local defence industry and the identification of local companies having such competencies be intensified. Thus, the identified lead industrial player and its related supporting players be invited to participate in receiving the offset technology and competencies
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Key Initiative I To develop competencies in defence industry in particular aerospace, maritime, automotive, weapon and ICT through the more effective management of offset programmes

ISSUE 2 Development of competencies means the need to train more people in specific areas. The defence industry should continue to enhance skills, knowledge, resources and other assets in keeping up with the nations strategic needs and regional realities within the specified time frame. There is a need to promote skills in areas that cover the competencies along the value chain. These include: competencies in the R&D for the land, sea and air applications; competencies in the design of the military hardware and equipment required on land, sea and air; competencies in the manufacturing of the product and product components; competencies in the assembly of such products and components; and competencies in the marketing of such products. The participation of universities, skill training and development centres is crucial in ensuring the successful implementation of skill and competency development programmes. These development programmmes need to be well co-ordinated to ensure that those programmes are inter-linked and complement each other rather than competing with each other. The development of human resource on defence technologies will require specialised training facilities at skill training centres and universities. Among areas of human resource development in defence technologies are on in depth knowledge of defence and weapon systems, new explosion capacity, lighter and more efficient firing systems, ballistics and new materials technology. Such knowledge and skill development are not readily available in the local training centres and universities.

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New faculties need to be introduced in the local universities particularly in the research and design capabilities in defence products and equipment and the skills training centres should focus on the production techniques. Activities mentioned under human resource development will thus increase the linkages between MINDEF and the local universities, colleges and the skills training centres. Key Initiative 2 To develop a cohesive and comprehensive defence industry human resource development programme to ensure sustainability in competency development, capacity and capability building

Key Initiative 3 To effectively draw upon the pool of trained military personnel leaving the Armed Forces with attractive remuneration packages

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5.2.2

THRUST AREA 2 TECHNOLOGY DEVELOPMENT


ISSUE 3 The development of core competencies and strategic technologies should be supported by intensive and continuous R&D initiatives. The government has to commit, initiate and promote dedicated long term R&D programme related to defence industry in the areas of product and application development. Dedicated R&D programmes may be undertaken by the public or the private sector. It has to be co-ordinated and closely monitored by Malaysian Defence Industry Council (MDIC) and Science and Technology Research Institute for Defence (STRIDE). The development for R&D should also include training the industry personnel at the suppliers design and training centres. The emphasis of such training should be on design competency to enable those industrial personnel to produce design concepts and prepare coherent blueprint of the final product prior to manufacturing. MINDEF should be a key player in the promotion of defence industry technologies. The promotion of such technologies by MINDEF can be undertaken by joint collaboration in research related activities between STRIDE, local / foreign universities and renowned and established defence research and development laboratories.

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Contracts on defence research and development should be awarded to the appropriate parties. In line with the spirit of the New Development Policy, preference should be given to R & D company, organisation or institution with majority Bumiputera equity ownership and participation. Research and development on defence products, equipment and systems should focus on technologies pertaining to new defence platforms for air, land and sea, electronics warfare systems and weaponry. The promotion of defence industry technologies shall entail the setting up of technology bank and database by STRIDE which may include information on defence technologies , technology providers and transfer of technology activities. Key Initiative 4 To establish comprehensive, well coordinated and dedicated long term R & D programmes and to promote the development of defence industry technologies through joint collaboration between STRIDE, local/foreign universities and renowned defence R & D laboratories as well as the need to establish a technology bank and database by STRIDE Key Initiative 5 To allocate dedicated and sufficient funding for R & D activities by both the Government and Malaysian Defence Industry companies

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ISSUE 4 The acquisitions of the defence products and equipment are relatively costly affairs. Hence, there is a need to consider various and affordable modes of payment for such acquisitions. Malaysia is rich in natural resources and one of the alternative initiatives of acquiring defence products and equipment is through a counter trade arrangement. Malaysia should utilise her rich natural resources to trade for defence products and equipment, besides the direct offset programmes. This countertrade arrangement should also include any purchasing of services from any foreign countries.

ISSUE 5

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New strategic technology acquisition means the need to have the right infrastructure which includes the readiness of the followings: Skill for new technologies; Core players; Supporting industries to support technologies; Incentives; Market; Financial assistance; and Assistance from government agencies. It takes some time for these to be put in place. However, the technology component has to come in first before other components such as human resource development, incentives, market, financial assistance and government assistance. Key Initiative 8 To step-up investments in the development of support facilities and infrastructure for new strategic technology acquisition/capital assets Key Initiative 9 To promote technological development through the hosting and participation of international defence exhibitions and seminars

Key Initiative 6 To determine and negotiate more effective offset programmes for technology transfer to Malaysian Defence Industry Key Initiative 7 To encourage Malaysian Defence Industry companies to enter into smart partnerships/collaborations/alliances with overseas technology partners

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5.2.3

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A good governing body and strong capabilities are key pre-requisites for the local defence companies to align their capabilities and competencies to meet the Armed Forces requirements. A good governing body is also required to oversee the industry and act where necessary. This include imposing a penalty for failure or on errant contractors, preventing duplication of specialisation, rewarding those who are good and promoting healthy competition among the players A close cooperation and continuous dialogue between the Government and the local defence industry is very important as for the users to upgrade their knowledge and awareness on what the local defence industry could offer. Key Initiative 10 To enhance and develop in-country capability and expertise in defence industry to achieve self-reliance in line with the National Defence Policy, the Second Industrial Master Plan (IMP2), the Third Outline Perspective Plan, Privatisation, Contractorisation and other Government policies

THRUST AREA 3 INDUSTRY DEVELOPMENT


ISSUE 6 Defence industry in Malaysia is at the early stage of growth. Most of the defence requirements are met by foreign suppliers. There is a need to increase the local contents and add value to the defence equipment used in Malaysia for strategic purposes. This will render the country from being too dependent on foreign equipment and spare parts. Malaysian Armed Forces is a ready market for the defence products manufactured by the local companies. There is a certain form of return on investment for companies to venture into defence industry. Various offset programmes have been initiated by the government to spearhead and support the development of local capability in the defence industry. Close monitoring and co-ordination is required in order to achieve self-reliance capabilities of defence industry. This can be achieved by identifying sectors, areas and levels of capabilities through Establishing database for local industries and conduct auditing to establish thorough capabilities and performances; and Networking between LDI companies.

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ISSUE 7 Defence industry needs to be recognised as an industry by itself and be classified as a sector of strategic importance, similar to those mentioned in the Second Industrial Master Plan (IMP2). Key Initiative 11 To recognise and classify Malaysian Defence Industry as a sector and incorporate it as part of the existing Industry Working Groups and Task Force under the IMP2 ISSUE 8 Malaysian defence hardware and software depend heavily on foreign products and services. Currently the nation still purchase equipment from overseas. The purchase of such defence hardware and software is costing the nation billions of Ringgit. Proper coordination is essential in ensuring successful transfer of technology to local defence industry players. There is a need to capitalise on such acquisitions in the development of the local defence hardware manufacturers and their supporting vendors. Through a proper technology transfer process we can increase our competency and therefore reducing our foreign supply and support services for defence equipment. Key Initiative 12 To encourage partnerships with foreign contractors in developing products and services for the defence and security forces. This will also facilitate in the inward flow of foreign direct investment

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ISSUE 9 Defence industry covers a wide area of applications. This industry would also cover the application for nondefence products and equipment on land, sea and air. These products and equipment can be further classified into technologies and competencies that can be applied to produce certain components required for applications covering all sectors of the defence industry. One such application may be on the electronics warfare system or the usage of radar for any defence application either on land, sea or air. There is a dire need to classify the defence industry into clusters as identified in IMP2. This would require specialisation by core manufacturers for each of the sectors of the local defence industry such that one of the core manufacturers could be a lead player while others could be vendors. Thus, duplication of activities by the core manufacturers could be avoided. Hence, production costs incurred by these manufacturers could render to be effective, in terms of investment amount and time. The areas identified by the government under the contractorisation programme should be used as reference for the industrys competency development and specialisation. Local companies must complement each other and avoid duplication of activities, thus avoiding unhealthy competition among themselves. The specialisation based on core competency will ensure greater focus and accelerate the process of self reliant. Key Initiative 13 To structure Malaysian Defence Industry by areas of specialisation

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ISSUE 10 The large investment requirements towards developing the defence industry is too much a cost to be borne by local industry players alone. The materials used in defence industry are not similar to that used in the nonmilitary environment. Apart from the materials used, the robustness and the endurance of the material used also need consideration. All these adds up to more reliable and robust production processes. So there is a need to formulate a new incentives for those involved in defence industry. The incentives formulated need to take into account of existing industry players as well new players but already involved in producing of non-military products and have been in the non-military market for sometime. The incentives should also cover import of raw materials since Malaysia do not produce the raw materials required for the defence industry. It has to be noted that current incentives given to manufacturers are for the imports of finished products as part of the final product (outsourcing components) and do not include the importation of raw materials. Other incentives identified include: Import duties exemption for LDI on equipment / spares to support defence needs Government agencies should assist LDIs to get certification for export Pioneer status - special consideration for LDIs Government to give support to sustain LDI in economic crisis Close cooperation between user, administrator and LDI in determining requirements and providing support Use procurement as leverage to get industry to improve The establishment of research and development grant for the purpose of continuing development work in the ICT areas but not limited to the involvement of STRIDE. Key Initiative 14 To provide special incentives for Malaysian Defence Industry in developing local defence products and services

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5.2.4

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THRUST AREA 4 DOMESTIC DEFENCE PROCUREMENT


ISSUE 11 Defence technology acquisition programmes should serve the purpose of industrialising the local defence Industry through systematic acquisition of specific knowledge and technologies. This requires the involvement of all parties concerned including: End-users; Coordinating bodies; Government of Malaysia; R&D Institutions particularly STRIDE; Universities; Skill development centres; Industry players;and Financial institutions. Defence procurement is part of the national procurement policy, therefore it would always take into consideration to : Develop and encourage the development of local industries; Encourage and to give priority to the involvement of Bumiputera owned and controlled companies; Enhance local institutional and industrial capability through knowledge and technology transfer; To further utilise local service sector; Achieve economic growth, as a tool for fulfilling the objectives of socio-economic development; Fulfill the procedures and requirements of government procurement; To always be in line with the terms and conditions imposed on all agreements related to privatisation and concession, by the Government;

The involvement of these players is to ensure any of the new technologies to be acquired may require new development in each of the specialised areas. In this regard, MDIC has to be a moderator in ensuring all parties concerned are fully aware of the implications and requirement of the new technologies.

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To be line with guideline by the Ministry of Finance related to procurement for national defence. Figure 5.2 shows the defence technology acquisition and its implications to the defence industry players in the country. Key Initiative 15 To involve and increase the participation of all parties concerned in the procurement planning and decision making processes to ensure smart defence procurement Key Initiative 16 To introduce new initiatives on procurement processes such as Long Term Contracts (5+3+2), Public Private Partnerships (PPP) and Private Finance Initiatives (PFI)

In addition to this, agencies related to industrial development should be involved in helping the industry players in the national procurement agenda for the defence The acquisition of new technologies means there is a need to consider issues pertaining to the technology acquisitions such as transfer of technologies, capability and competency development, enterprise development, mode of payment and financial aid to the enterprise. Opportunities in projects must be given to local contractors with maximum local contents, where possible. This is to ensure that the country has an adequate level of self sufficiency and self reliant. Foreign partners and organisations should only be limited to areas and competency not available in the country.

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ISSUE 12 Involvement of Stakeholders in the Acquisition Process The acquisitions of new defence products and equipment for the Malaysian Armed Forces are the responsibilities of all the parties concerned, in particular the Government of Malaysia through MINDEF, defence industry companies, skill training institutes and financial institutions. In this respect, these parties are to assist in formulating appropriate procurement planning to ensure that the nation is ready for any acquisition or placement of any new technology pertaining to defence. In ensuring any smooth technology acquisition for defence products and equipment and in line with the requirements for self-reliance, there is a need for closer involvement among all the parties concerned in the procurement planning and decision making process. All the parties as mentioned above are stakeholders for such acquisition and they are strategic partners to the local defence industry. Improving the Bidding and Selection Process The existing bidding process of technology acquisition for defence products and equipment in Malaysia is relatively a long process. This bidding process could continue to maintain its relevancy should the inputs towards the selection process with respect to any acquisition of defence products and equipment as proposed by the bidders be professionally evaluated. Therefore, there is a need to develop a professional selection process methodology that can quantify and justify a qualitative and superior technology acquisition approach for defence products and equipment for the Malaysian Armed Forces.

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Realignment of Procurement Activities and Strategic Goals In order to be self-reliance on the defence capabilities, the Government of Malaysia had undertaken a numbers of procurement exercises through various countertrade and offset programmes. Under these programmes, the government encourage the local defence companies to develop technological capabilities in defence which could acquired from foreign counterparts, rather than undertakes procurement exercise per se. Currently the technological capabilities in defence, acquired by the local defence companies are not in tandem with the acquisition of products and equipment by the Malaysian Armed Forces. There is a dire need to realign the existing countertrade and offset procurement activities with strategic goals of the nation to ensure continuos development of capabilities in related defence technologies and competencies. Preferential Treatment to Bumiputera Companies In line with the spirit of National Development Policy, the selection process encourage the involvement of Bumiputera companies given that the companies fulfil the technical specifications, pricing requirements and other relevant government requirements. This will help the Bumiputera companies to participate in the development local defence industry.

Key Initiative 17 To improve acquisition of platforms, weapon systems and various solutions by focusing on product life cycle management and codification

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5.2.5

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THRUST AREA 5 INTERNATIONAL MARKETING


ISSUE 13 The market for local defence products should be further expanded into non traditional defence market. Present capabilities in production, manufacturing and marketing of the defence products and equipment should be further enhanced in order to increase the competitiveness of local defence products and equipment in the international market. The Government should assist the local players to expand their market coverage through Government to Government networking and arrangement. Key Initiative 18 To upgrade present Malaysian Defence Industry capabilities to international standards so as to ensure that the products and services meet the needs of overseas customers Key Initiative 20 To leverage bilateral defence meetings to promote Malaysian products and services Key Initiative 21 To effectively utilise the office of Malaysian Defence Attaches and MATRADE to promote Malaysian products and services Key Initiative 22 To develop a comprehensive directory of Malaysian products and services for effective international marketing Key Initiative 23 Key Initiative 19 To promote Malaysian products and services through participation in international defence exhibitions To restructure the Defence Industry Division to take on the role of promoting Malaysian products and services abroad such as is the case of DESO, UK

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FRAMEWORK FRAMEWORK FOR FOR TECHNOLOGY TECHNOLOGY ACQUISITION ACQUISITION IN IN GOVERNMENT GOVERNMENT PROCUREMENT PROCUREMENT Figure 5.3
KEY SECTORS ( TECHNOLOGY INTENSIVE ) Aerospace Automotive Health Education TECH. DEV. POLICIES & GUIDELINES S & T Policy Industrial & Tech. Policies IRPA Industrial Master Plan Blueprint ( various ) TECHNOLOGY NEEDS Platform Technologies System Integration Advanced Material Adv. Manufacturing Molecular Nanotechnology Photonic Agriculture Marine Transportation

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STAKEHOLDERS
Companies Universities Research Institutions MTDC others

TARGET PROCUREMENT

DEV. & BUDGET PLANS

EPU Treasury MiGHT Other Ministries

Transportation
Resource Based Agro-Based Machinery Equipment Chemicals etc.

Malaysia Plan Outline Perspective Plan Annual Budget

TDA

Administering & Implementing Ministry R&D INSTITUTIONS BENEFICIARIES OEMs


Source : MiGHT, Study on Offset Programmes of the National Defence Procurement , March 2002

ACADEMIA

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PART F SUMMARY OF THRUST STATEMENTS AND KEY INITIATIVES

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SUMMARY SUMMARY OF OF THRUST THRUST STATEMENTS STATEMENTS AND AND KEY KEY INITIATIVE INITIATIVE

OBJECTIVE The Defence Industry Blueprint is aimed at : to provide an overview of the Malaysian Defence Industry; to provide guidelines for the development of local defence Industry; to prioritize strategic technology areas of focus to catalyze the defence industry development and capability building; and as a reference to all various entities and stakeholders of local defence industry

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To

spearhead the sustainable development of

Local Defence

Industry, the government, stakeholders and players have identified FIVE Strategic Thrust areas, supported by Twenty-three Key

Initiatives.

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RECOMMENDATIONS
THRUST & KEY INITIATIVES Human Resource
A comprehensive and cohesive human resource development plan to build critical competencies for the Malaysian Defence Industry is crucial in ensuring the industrys ability to carry out its role in the nations defence

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THRUST AREA I Human Resource and Competency Development

Key Initiative 1

To develop competencies in defence industry in particular aerospace, maritime, automotive, weapon and ICT through the more effective management of offset programmes

Key Initiative 2

To develop a cohesive and comprehensive defence industry human resource development programme to ensure sustainability in competency development, capacity and capability building

Key Initiative 3

To effectively draw upon the pool of trained military/security personnel leaving the Armed Forces/Security Forces with attractive remuneration packages

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THRUST & INITIATIVES Technology Development


THRUST AREA 2 Technology Development To ensure that Malaysian Defence Industry has continuous 90 access to the state-of-the-art technology for the use of the Malaysian Armed Forces. For this purpose, a comprehensive program to acquire technological capability either through indigenous development or technology transfer from foreign partners including international collaboration, should be clearly identified and strictly monitored to ensure success To establish comprehensive, well coordinated and dedicated long term R & D programmes and to promote the development of defence industry technologies through joint collaboration between STRIDE, local/foreign universities and renowned defence R & D laboratories as well as the need to establish a technology bank and database by STRIDE To allocate dedicated and sufficient funding for R & D activities by both the Government and Malaysian Defence Industry companies To determine and negotiate more effective offset programmes for technology transfer to Malaysian Defence Industry To encourage Malaysian Defence Industry companies to enter into smart partnerships/collaborations/alliances with overseas technology partners To step-up investments in the development of support facilities and infrastructure for new strategic technology acquisition/capital assets To promote technological development through the hosting and

Key Initiative 4

Key Initiative 5

Key Initiative 6

Key Initiative 7

Key Initiative 8

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Key Initiative 9

THRUST & INITIATIVES Industry Development


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THRUST AREA 3 Industry Development To ensure the nation is focussed and committed in developing a credible domestic defence industry for achieving national self-reliance

Key Initiative 10

To enhance and develop in-country capability and expertise in defence industry to achieve self-reliance in line with the National Defence Policy, the Second Industrial Master Plan (IMP2), the Third Outline Perspective Plan, Privatisation, Contractorisation and other Government policies To recognise and classify Malaysian Defence Industry as a sector and incorporate it as part of the existing Industry Working Groups and Task Force under the IMP2 To encourage partnerships with foreign contractors in developing products and services for the defence and security forces. This will also facilitate in the inward flow of foreign direct investment To structure Malaysian Defence Industry by areas of specialisation

Key Initiative 11

Key Initiative 12

Key Initiative 13

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Key Initiative 14

To provide special incentives for Malaysian Defence Industry

92 THRUST & INITIATIVES Domestic Defence Procurement

THRUST AREA 4 Domestic Defence Procurement

The domestic defence procurement process must be leveraged as a strategic tool in acquiring strategic technologies as well as in the development of Malaysian Defence Industry

Key Initiative 15

To involve and increase the participation of all parties concerned in the procurement planning and decision making processes to ensure smart defence procurement

Key Initiative 16

To introduce new initiatives on procurement processes such as Long Term Contracts (5+3+2), Public Private Partnerships (PPP) and Private Finance Initiatives (PFI)

Key Initiative 17

To improve acquisition of platforms, weapon systems and various solutions by focusing on product life cycle management and codification

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THRUST & INITIATIVES International Marketing


THRUST AREA 5 International Marketing To ensure that Malaysian Defence Industry becomes a truly global player, the issues of international standards and competing in the international marketplace has to be addressed

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Key Initiative 18

To upgrade present Malaysian Defence Industry capabilities to international standards so as to ensure that the products and services meet the needs of overseas customers To promote Malaysian products and services through participation in international defence exhibitions To leverage bilateral defence Malaysian products and services meetings to promote

Key Initiative 19

Key Initiative 20

Key Initiative 21

To effectively utilise the office of Malaysian Defence Attaches and MATRADE to promote Malaysian products and services To develop a comprehensive directory of Malaysian products and services for effective international marketing To restructure the Defence Industry Division to take on the

Key Initiative 22

role of promoting products and services abroad All rights reserved; no part of this publication may be reproduced, stored in a retrieval system,Malaysian or transmitted in any form or by any means,electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of Defence Industry Division, Ministry such as is the case of DESO, UK of Defence, Malaysia

Key Initiative 23

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References 1. Local Defence Industry Blueprint Workshop Report, Regency Hotel & Resort, Port Dickson, 10-12 October 2002 2. Piloting The Aerospace Industry Take-Off, Blueprint for The Malaysian Aerospace Industry, Malaysian Industry-Government Group for High Technology (MiGHT), December 1996. 3. Economic Report 2002 / 2003, Ministry Of Finance, 20 September 2002 4. Bulletin, Majlis Industri Pertahanan Malaysia, volume 2/2001, June 2001 5. System Analysis and Design Methods, Fourth Edition, Jeffrey L. Whitten, Lonnie D. Bentley , 1998 6. Study on Offset Programme of the National Defence Procurement by MiGHT ( March 2002) 7. Automotive Technology Competencies Programme, Perkhidmatan Rundingan Industri Malaysia (PRIMA), November 2001 8. Countertrade Gap Analysis Report,Johan J van Dyk, September 2002

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95

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