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In April 2010, Britain’s BAE Systems Plc and Turkey’s Nurol Holding AS reportedly signed a letter of intent worth up to $500 million, to help supply about 250 armored vehicles to the Malaysian government through their FNSS Savunma Sistemleri AS joint venture. Their Malaysia partner will be a unit of Kuala Lumpur-listed DRB-Hicom Bhd., who will perform assembly in country.
That became a contract in 2011, but the overall program cost from Malaysia’s budget will be about $2 billion higher. Now, why might that be?
Malaysia’s AV-8 APCs
The new AV-8 APCs will be based on FNSS’ wheeled Pars 8×8 Armored Personnel Carrier, which was designed in conjunction with GPV Inc. of New Haven, Michigan. In 2006, Malaysia had tested the Pars 8×8 against the Swiss MOWAG Piranha IIIC, and the Patria Oyj AMV from Finland. The Pars design was chosen, which left negotiations and industrial partnerships as unfinished business.
Malaysia’s DEFTECH will be the principal assembly agent, and its engineers will work with Nurol holding subsidiary FNSS to customize the vehicles for Malaysian requirements and equipment. South Africa’s Denel will reportedly build a 2-man turret for the APC, while Sapura Thales was expected to become the systems integrator.
Malaysia reportedly plans 12 AV-8 variants including a APC, anti-tank weapon carrier, command-and-control, and anti-aircraft variants.
Malaysia’s AV-8 Program
The Malaysian army had expected to take delivery of a prototype AV-8 APC for testing in 2011, followed by deliveries from 2012-1018, but they didn’t sign the contract until mid-2011.
That usually means project delays. One mitigating factor is that the AV-8 contract builds on past relationships. Malaysia’s air force and navy are significant BAE clients, and Malaysia was already an FNSS customer as well. A series of contracts signed over 2000-2008 led to orders for 268 Adnan tracked vehicles, which incorporate design elements from BAE’s M113 MTVL and FNSS’ ACV-300 variant. They serve in roles including APC, IFV, ambulance, command, mortar, anti-tank, and armored recovery variants.
Overall project budgets for Malaysia’s “AV-8 APC” sit at RM 7.55 billion (about $2.51 billion), well above the $559 million going to FNSS and BAE. The question is why.
Statements to date have tried to justify it by citing development costs, but beginning from a complete platform like FNSS/BAE’ Pars 8×8 should keep those low.
Some of the extra $2 billion comes from the fact that this is an industrial project that’s paying to enhance a local industry and make a regional statement, rather than a straight purchase aimed purely at meeting military needs. Setting up that industrial infrastructure, training workers, and ensuring technology transfer does cost some money.
Then there’s the fact that Malaysia is best described as a partly-free country, where corruption is not unknown. Setting up the local industrial and support infrastructure offers very convenient opportunities to enrich political figures tied to sub-contractors, a practice that’s extremely common in the Middle East as well. There are also credible reports of straight corruption and graft in Malaysia’s previous major defense buys, going all the way to the very top of its political structure.
The question is whether Malaysia’s current political arrangements offer much in the way of countervailing accountability. History suggests that they will not.
Contracts & Key Events
July 10/12: Turrets. Denel had been named as DEFTECH’s weapons partner when Malaysia signed its contract in February 2011, but a formal contract took a while. Now, a R 3.5 billion/ EUR 340 million contract will provide Malaysia with 177 turrets, offering a range of weapons from 12.7mm machine guns, to 30mm cannon, to cannon and Ingwe laser beam-riding missiles:
* 69 x GI30 30mm main gun.
* 54 x missile turrets with GI30 30mm gun + 4 Ingwe missiles.
* 216 Ingwe laser beam-riding anti-tank missiles
* 54 x Remote Weapon Systems, which are usually limited to 12.7mm machine guns or 40mm grenade machine guns.
We cannot say whether the 30mm and missile turrets are Denels LCT or MCT turret family. Sources: defenseWeb, “Denel inks R3.5 billion deal with Malaysia”.
June 4/11: BAE announces that its NSS of Turkey joint venture has received and signed a $559 million letter of offer and acceptance (LOA) from DEFTECH of Malaysia for the design, development and manufacture of 257 DEFTECH AV-8 8×8 wheeled armored vehicles, plus Integrated Logistics Support for the Malaysian Armed Forces.
This is reasonably close to the cost of buying that many Pars vehicles off the shelf, leaving almost $2 billion in the program budget for development costs, industrial infrastructure investments, and “other” expenditures. FNSS will provide the technical assistance and technology transfer to enable DEFTECH to produce the vehicles in Malaysia.
Feb 23/11: Malaysia’s government issues a Letter of Award to DRB-HICOM subsidiary DEFTECH, to design, develop, manufacture, commission, supply and deliver 257 8×8 Armoured Wheeled Vehicles, in 12 variants. The Contract is valued at RM 7.55 billion ($2.51 billion) is for a period of 7 years commencing from 2011… or about $9.77 million per vehicle. From DEFTECH’s release:
“DEFTECH, via this Contract, will spur and enhance the growth of the Malaysian economy through an economic enhancement program which consists of transfer of advanced defence technologies from its technology partners and original equipment manufacturers (“OEM”), research & development and local vendors development.
DEFTECH will also own its first intellectual property rights on armoured wheeled vehicle systems and sub-systems. Many new local OEMs will be created through direct and indirect foreign investments during the duration of the Contract… Close collaboration with its technology partners and principal OEMs will also enhance… competencies in project management, supply chain management particularly defence business processes as well as systems engineering, amongst others.
The Contract will not have any material effect on the earnings, gearing and net assets of DRB-HICOM Group for the financial year ending 31 March 2011. However, the Contract will contribute positively to the future earnings of the Group.”
April 21/10: BAE and Nurol sign their LoI, but the projected cost of the APCs raises alarm bells outside Malaysia’s government. Malay Mail | Bloomberg | Defense World | UPI.
Additional Readings
* DID (Nov 15/10) – Scorpene’s Sting: Liberation Publishes Expose re: Malaysia’s Bribery & Murder Scandal. Underlines reasons why a $2 billion AV-8 program fund for extras beyond contracts to BAE/FNSS might raise some concerns.
