You're listening to Asia Centric from Globerg Intelligence, the podcast that pulls back the curtain non global business so you can invest better across the Pacific rim. I'm Tom Corbett in Hong Kong.
And I'm John Lee. The Russia Ukraine war is forcing governments to rethink their conceptions of war, the role of technology and military spending.
The rise of Asia's economic prosperity this century has also been accompanied by a large build up in defense spending across the region.
How will technology and artificial intelligence reshape the global balance of power? Who stands to win or lose? And can the US and China make the hard choices to keep growth alive and keep global business prosperous.
I think what has changed, especially looking at Russia's invasion of Ukraine, is that that idea that wars will be short, bloodless, clean has evaporated.
Let's bring in Kevin Brand, aerospace and defense analyst with Bloomberg Intelligence. He joins us from Washington.
Kevin, Welcome, Thanks Tom, John, Pleasure to be with you.
Hi, Kevin. Are we in a global arms race? Everywhere? I read countries like Japan, Korea, Australia, China, Poland are all increasing their defense budgets.
Yeah, great question. I think the answer is to some degree, yes. Now, I wouldn't characterize that as potentially an arms race, but the investment that you're seeing sort of across the board builth in Europe now and in Asia and to a lesser extent in parts of Latin America is definitely been spurred by global events, not the least of which has been the Russia's invasion of Ukraine, both in twenty fourteen in the most recent invasion that sort of threw off the
veil of wars of aggression in the modern era are impossible, and so that has kind of regalvanized people needing to spend money on their defense infrastructure and be able to protect their own borders.
And which countries are seeing the biggest increase in military expend each other?
Yeah, well, right now, the biggest jump is in Europe as they're starting to move back towards their two percent pledge of GDP for NATO defense spending. So that's probably what's in the lead right now based on current events. But historically, what I would say over the last ten or so years, really since Secretary Clinton went to Shangrila in about the two thousand and eleven time frame and
announced the US pivot to Asia. You've seen Asian defense spending really rise at double digits if you look at China specifically in East Asia up seventy two percent really since about twenty and eleven, so massive defense spending. You're seeing the same thing in Japan right now, in Korea, to a lesser extent, in Thailand, Indonesia, in parts of Singapore.
And what do you think explains that, Kevin? Is it that we're just in a different world now? Is it that we've got one superpower trying to hold its ground while another one slowly emerges or is it more complex than that?
No, I think that's exactly it. If you really look at what happened since the demise of the Soviet Union sort of the nineteen ninety one time frame, where we had a unipolar world very very quickly, that security environment enabled really the Asian countries we used to refer to them as the Asian Tigers, right, Their economies just really exploded, giving birth to middle classes, upper income that allowed people
to spend on defense. But really what that did is as those economic ties sort of became more and more robust, and you had in large increases in trade. There was a natural tendency that those countries who were benefiting from those trade wanted to be able to secure those trade lanes. So China's rise is a perfect example of that expanding of their military to secure their own trade and relationships,
to be able to provide for their own defense. But the second and the biggest trend I think there is as the rise of China came up, as they became a little bit more assertive in the region, that tension of a rising power meeting and established power has led the rest of Asia to sort of hedge their bets. They don't want to have to pick a side between
the United States and China. China's going to remain probably their number one economic trading partner, but from a security perspective, the United States is sort of that guarantee of security, but neither country wants to pick a side.
And how much more can military expenditure go for these countries.
There is a large draw especially with this uncertainty sort of in the global economic environment where there's going to be a recession next year in the United States or in Europe. That sort of drives the rest of the
globe into a recessionary period. That could put a lot of pressures on discretionary spending in these countries and social programs, especially in China as you look at sort of the aging of the population results the legacies of the one child policy, having to pay for parents, the evaporation sort of decline of the housing bubble which hasn't burst yet but is in difficult straits. That's going to pressurize in
lots of places the available money for defense. My best guess looking at sort of the trend lines is places like Thailand, Japan, Korea, maybe Indonesian Philippines. To a lesser extent, you could see growth at around the six percent mark, above the rate of inflation. But everywhere else I think you're going to see that sort of moderate into the two to three percent range, which, if inflation remains high globally, will actually be a net decline in global spending per GDP.
Kevin, let's move to the US. We've been hearing a lot about this debt ceiling and the issues it seems to crop up every year. Is this impacting the increase in potential US spending on defense?
It is, But more importantly, it throws into this perpetual conversation about can we pass a National Defense authorization on time? Can we pass the defense budget on time? Debt ceiling aside.
Sort of a larger thing that tends to be at play is consistently funding defense so that the defense industrial base, those industries and contractors that really supply the training, the equipment that the UNUIS military relies upon, has a steady demand sigle, so they can actually forecast for what they need to spend, as we're seeing play out in Ukraine right now. If you just look at the amount of munitions that they're you really can't surge your industrial base
in time of war. And if you can't give them a predictive demand, they can't invest for the future to have that supply base where you need it to be.
Kevin Brand Back during the Reagan era, President Reagan pretty much gave the Defense Department everything it asked for, or at least pretty close. We are in a much different era now when it comes to the cost of maintaining our defense capabilities technologically and otherwise. How do you see those higher costs? I assume they are higher costs now. Relating to the nation's ability to fund them. So I think there's two sort of macro trends. One John alluded
to earlier with the debt ceiling. We continue to borrow, We continue to spend above the revenues that the United States brings in. That has two large implications. One is the size of the discretionary budget in the United States continues to shrink as we have to fund sort of mandatory spending social Security, Medicare, and service the debt. So as the debt takes a larger and larger chunk of the national budget, that's going to squeeze discretionary spending, which
includes defense. The second thing is the United States pensiant for high end precision guided munitions and just in time manufacturing, so where you kind of leaned out your supply chains. That places a premium on sort of the prices you pay, and as you pursue higher technologies, in some cases the technologies aren't as proven or as you have to test those and certify that those weapons systems are safe to use.
When they're leading edge technology, that tends to become very expensive, and what we see happening typically is initial order quantities decline over time. So we may have a forecasted buy of one hundred units of aircraft or ships, and very quickly those truncate down to thirty or twenty, and the cost per unit rises pretty high. And those higher costs are coming at a time when arguably the stakes geopolitically are just as high as they've been or even higher.
Yeah, it's very unfortunate for the United States. We're in a position now where having been the world's sort of sole superpower for a while and with a penchant for high technology, our labor markets and our costs to produce any unit have gone up exponentially. That is not the case in other parts of the world. China is catching up in their labor costs to a rising but they can still produce equipment much cheaper than the United States.
And the implications for that are Yeah.
So the implications are over time we will reach near parity across all the warfighting areas in the air domain, in the surface domain, and the undersea domain, and potentially space and information warfare, which as we've seen in Russia, that competition for the information domain the public narrative is
increasingly important. But what that really means is all of these bodies of war fighting domain are going to be contested, and the United States is going to have to work with its allies and partner partners in the region to sort of equal the combat power essentially of China. This way the throw weight of China.
Kevin, So, you brought up an interesting point. The US still spends a lot more money than China on defense front, but you're saying that China just gets more value for the buck.
That's right, if you think about it in terms of purchasing parity power, right, China is at a strategic advantage on costs for what they can afford. The other thing, though, really that doesn't get as much play, is they have invested heavily in their defense industrial base. You know, notwithstanding the sort of the blending of private ownership and state
run directed economies. But if you just look at the size and scale of the defense industry that China has to rely upon, their manufacturing base far exceeds that of the United States. Because, again, you know, right, wrong or indifferent, the United States has sort of leaned out its industrial base.
You've seen a lot of consolidation in the defense industry, sort of the Big five primes and that lack of competition and that lack of surge capacity has really limited our ability to produce quantity at cheap price.
You're listening to Asia Centric from Bloomberg Intelligence. By the way, if you like what you hear, and we hope you do, please rate us on Apple Podcasts, Spotify, Google Podcasts, or wherever you may be listening to us. Of course, more stars are better. Your feedback matters, and we love hearing from our listeners. Kevin Brand. Technology has over the past century changed our lives in ways that we don't need
to elaborate on. But one thing that technology has done, at least from a military perspective, is that it has enhanced the human power to kill and destroy. From your perspective and your study of the evolution technology as it applies to the military and defense, what surprises you most about how it has changed the nature of warfare?
So I'd say two things. One is the United States, especially the Western allies Western Europe, we had sort of convinced ourselves that wars of aggression were going to be rare in the future or uncommon at least that had
led us to smaller sales sort of contingencies. The idea that a massive show of force with high precision could have outsized impacts on the battlefield, and that allowed the United States and the West to sort of pursue these high technology, precision weapons which tended to be exclusive and
very expensive, sort of the exquisite weapons systems. The second thing is we really thought that by dominating that battle space and having sort of uncontested control of the air, sea and underwater domain, that we can have those outside effects on land, on governments, on nations. And we also thought we could do this in a very quick, surgical way. Essentially,
future wars would be short. I think what has changed, especially looking at Russia's invasion of Ukraine, is that that idea that wars will be short, bloodless, clean has evaporated. That doesn't mean, though, that the reason to have technology goes away. Europe this sort of a land centric theater. If you think about that domain, it requires standing armies. Controlling territory is just a hard fought slog. You can see the artillery jewels back and forth between Ukraine and Russia.
The Pacific is a different domain. Vast distances, you know, twenty three time zones we're talking about in order to project power there. It takes days to get to the region from the United States from the West coast. That requires a different type of force with long range, reach, precision, fast weapons. That's why you're seeing this pursuit right now. I think of hypersonic weapons, among other things, in order to compress those times lines and battle spaces.
The supersonic weapons.
Ten years ago, I would have said, yes, the United States was well in the lead on hypersonic technology in our research and development. We sort of abandoned that because there wasn't a pressing need to have those technologies on board. We didn't see an offensive threat that we the United States needed to project that sort of power in the near term. That game has changed a little bit with sort of the rise of China, and we're actually playing catchup.
China is a little bit ahead of the United States, probably by a couple of years.
Kevin, is it going to be possible for technology to give any nation or any alliance of nations and edge a sustainable edge over another or is the nature of warfare in the future going to hinge upon something else other than technology.
So the nature of warfare still is sort of unchanging contest of wills political wills among countries and the methods by which you wage that war. The technology she's involved, we'll change over time as technology changes. What I see technology doing is having a very specific role in very specific tactical situations. But what's going to matter more than the technologies because those will be sort of ubiquitous across
the board equal access to people. You might have a little bit more of a technological edge in one spot or another, But the thing that's quickly coming to bear is really can you bring that technology to bear in a time and place of your choosing and in sufficient quantities to impact whatever the situation is on the battlefield
or a political environment. And so it's going to be a combination of technology, speed of action, speed of decision, it's employment, and do you have this sufficient quantity to impact the situations. Those are kind of the factors that will come into play.
And Kevin, with the Russia Ukraine war, what lessons are they providing defense plan is in terms of what the weapons that will be used in the future.
I think what Russia's war in Ukraine has shown is that and war is really about attrition and there's no other way around that. You have to grind to a political stalemate and a negotiated settlement one way or the other. The idea of total victory is probably an illusion, and that requires investment in your defense industrial base. It requires munitions,
it requires stockpiles of munitions. And if you think about I think one of the biggest things is it has thrown off this idea that in the defense space, just in time manufacturing, just in time supply is probably not the right national security decision for your country to make.
And what about drones. There's been a lot of press coverage on the success of drones. Is this a game changer and a lot more country is going to adopt this technology?
Yeah? Absolutely. I think there's two key technologies in there, and they're related. The first is unmanned you name it. It could be surface vessels, it could be under sea vessels, it could be aerial vehicles. And those vehicles will increasingly have sensor packages on them that could include armed sensor packages,
and we'll see those employed. So I think over time you'll see a migration from large, heavy, exquisite platforms that take a long time to build to more nimble, smaller, many systems that are networked together that you can employ both from a sensor package and from a weapons employment perspective.
I think that's one. The second thing I think that's going to become ubiquitous is this pursuit of artificial intelligence because as these systems and sensors proliferate, the need to make sense of the data that is coming in from all of these dispersed sensors increases, and that information overload is something that the human in the loop or the commander is going to need some help with, and these artificial intelligence tools from machine learning can help parse that
information and distill down what is the most important information to act on. So that's going to be an important component of future war.
And as you mentioned, speed of decision making is going to be increasingly essential to military success and in other aspects.
Because of all that information that's out there. The commander who is able to understand the space make a decision, make that decision first, and make that decision accurately, and then put a weapon on a target or the most critical target first, is going to be victorious in battle. And so AI I think is going to play an increasing role or automated decision aids in some way shape or.
Form our guest is Kevin Brand, thirty year Navy veteran and aerospace and defense analysts with Bloomberg Intelligence. Kevin Back in the nineteen fifties, President Dwight Eisenhower of the United States warned us for the first time about the military industrial complex. He warned us about the consequences of war essentially becoming profitable, which makes it more likely that countries
might engage in it. Do you think that doctrine still holds, does it still play a role in today's theater, or is that something of the past.
So I would turn that question a little bit on its head. I think if you're going to have a national security or defense policy, you need to provide for your national defense. You're going to have to rely, in some way, shape or form on your defense industrial base to provide the men, machine tooling, etc. To equip those armed forces. The relationship you have with the defense industrial
base has to evolve over time. So to your point, at the end of the Cold at the end of the World War II, the defense industrial base sort of was in a very robust position coming off of mass production. You saw consolidation occur relatively rapidly in the post World War two era and then stabilize through the Cold War.
At the end of the Cold War, you saw massive defense consolidation down into a few big prime contractors, and that leaning of the defense industrial base really drove up US costs and it limited competition, and it also though narrowed the surge capacity of the defense industrial base to
deal with major conflict. That's going to be something that the United States has to look at and how they add some capacity to the defense industrial base, how they encourage small business startups and diversify that defense industrial base in order to bring the costs down for various weapon systems.
If we're going to compete, Kevin, which companies benefit from rising defense budget spending?
So in the United States right now, it's really primarily driven by your big primes. So you can think raytheel N, Lockheed, Northrop Grumman, General Electric, Boeing sort of and some of their subsidiaries. Those tend to be the big primes that are looking at the major weapon systems, the tanks, the aircraft,
the surface ships. So those will continue to be major players looking ahead as you start to get into some of the more disperse drones and kind of commercial off the shelf technology proliferate to a lot of different companies that are out there. You can see aero v inmet and some others that are out there that are smaller as far as revenue goes, but are on the sort of cutting edge of weaponizing drones and small networking of
unmanned platforms. In Europe, I think you're going to continue to see some defense consolidation there in the big primes, whether it's Bae and Britain, whether it's Kraus in Germany. I think there's not a hole of riementhal there's not going to be a whole lot of I think expansion in the European defense industrial base just because of the
nature of the European Union. In Asia, I think you're still going to see some domination really by Japan, the major heavy industries in Japan and Korea, and to a lesser extent, you know, China and Russia, whose foreign military sales tend to proliferate through Southeast Asia and South Asia.
Kevin, you worked in the US Navy for thirty years. What has surprised you most about watching the Russia.
I think the first big lesson is how difficult it really is. To dislodge dug in prepared troops in a land campaign. As a Navy individual, I've studied war, but my domain of choice is sort of the air and surface space, not land warfare. And I think it's a wake up called. After sort of twenty years in Iraq and Afghanistan, the United States became sort of lighter, more mobile, looking at counterinsurgency what they would call coin type operations.
And when you get back to conventional forces in a knockdown, drag out sort of competition for territory, that is a very difficult environment, something in the United States really hasn't seen since World War Two, notwithstanding in Golf War One that was a different sort of environment. We're much more akin to the urban fighting of World War Two than we were a Gulf wer type scenario.
Kevin Brand wanted to shift gears. Just briefly. Let me mention two prominent business names to you, Jamie Diamond and Ken Griffin. Jamie Diamond who is the CEO of JP Morgan Chase. Ken Griffin is the head of Citadel. Both have made rather upbeat remarks recently about China, the business prospects there, the opportunity, the growth prospects given what you know about the overarching state of relations between the US
and China and the rhetoric between the two countries. Are Diamond and Griffin just prescient or is there something they're overlooking.
Yeah, it's a great point. I think, you know, first, to be fair, from a national security perspective, which is what I do, I look at sort of a long term strategic environment in competition, and the national security establishment has sort of looked at the rise of China and it's a sort of behavior in the region and said from a standpoint of US national security and US primacy that China is a threat to United States standing on
the globe, and competition will ensue. That does not necessarily mean conflict aggression, but there will be a strategic competition that's at play. From a business investment standpoint, whose time horizons can be depending on whether your eventual capitalist private equity you know, could be anywhere from one to five years. You know, China's growth and the growth of other reasons. You know, you could take a look at India has the potential to reach high single digit returns, probably probably
not double digit returns anymore. In GDP growth at least in China, but that far exceeds some returns that you can get elsewhere in markets. And so from a business perspective, looking at the size of the China market and looking at the growth and potential GDP, that's a very attractive proposition, especially in the near term. I think longer term strategically though, there could be some cost to companies that continue to do excessive business sort of in China, whether that's reputation costs,
human rights, et cetera. But I think for the near term that the attraction is really return on investment, and that's hard to deny.
Our guest has been Kevin Brand, aerospace and defense analyst with Bloomberg Intelligence and a thirty year Navy veteran. Kevin, It's been a wide ranging conversation about China military history and technology, and we look forward to staying in touch as developments unfold.
Thanks Tom, John, pleasure to be here.
I'm Tom Corbett in Hong Kong, and I'm John Lee.
This podcast was edited by Clara Chen and you've been listening to the Asia Centric podcast