China Chipping Away at the West's Defense Market Share.

• Author: Lin, Aaron

For several decades Chinese arms manufacturers produced low-cost weapon systems that could not match the sophistication of the long-dominant Western arms manufacturers in the United States and Europe.

However, recent advances in defense equipment have enabled Chinese defense contractors to compete more effectively while retaining lower prices, making Chinese arms an increasingly attractive choice for customers worldwide. Opportunities for future Chinese arms sales--which could total more than $275 billion over the next decade--include many niche footholds through which China can further chip away at the market share of Western defense contractors.

As Chinese firms continue expanding their ability to compete in the defense marketplace, Western contractors need to be aware of the factors that may attract customers to China such as: constrained defense budgets; strong interests in supporting local defense industrial bases; imperatives to diversify arms suppliers; and growing gaps between customer political positions and the West.

Buying Chinese becomes even more appealing when coupled with China's willingness to finance arms sales with large loans, which place few restrictions on end use of its weapons.

Many customers who have considered purchasing weapons from Chinese contractors have small military procurement budgets that could not support the high cost of Western equipment. Cash-strapped customers, such as those in South America and Southeast Asia, face either volatile economies or competing national economic development priorities, both of which can divert funds from defense budgets and constrain procurement of imported arms.

Chile provides a good example of government funds being diverted to other priorities. Chile recently repealed its "Copper Law," which mandated that the state-run mining company Codelco send 10 percent of its export sales to the military. In the past decade, the Copper Law directed more than $ 12 billion to the Chilean military, but lower copper prices have hurt Chilean government income, decreasing the funding available to re-invest into the upkeep of Chile's mining sector and limiting the funds available to route to the national economic and social safety net. By repealing the Copper Law, Chile will divert funds from the military to these other parts of the government budget and the mining sector.

Currency fluctuations can also have a significant effect on defense budgeting. For countries like Argentina, Brazil and...