This article first appeared in Forum, The Edge Malaysia Weekly on March 31, 2025 - April 6, 2025

Depending on one’s perspective, the Littoral Combat Ship (LCS) episode, the Ministry of Defence’s naval shipbuilding project, is at once a failure and a success.

The ferocity of criticism that followed the report of the parliamentary Public Accounts Committee on the matter in 2022 had left an imprint on everyone’s mind that it was a sheer waste of public money. The concern over the delays and the governance was completely legitimate given the massive amount at stake as it was the largest defence contract ever signed by the government.

But beneath the layer of governance, LCS is a serious industrial project that has produced tangible economic benefits.

Out of the RM9 billion contract value awarded to the shipbuilder, almost half of the amount was spent on obtaining technologies, parts and services from local companies.

As this is a combat shipbuilding venture involving specialised skills and significant industrial and technological equipment, the work required to produce a vessel the size of a football field has benefited about 400 local companies, which in turn employ hundreds of engineering, vocational and technical workers.

The recent successful deployment of the first LCS for sea trials is a testament to the technical capability of our local engineers and shipbuilders.

Lumut, which would have otherwise been a sleepy town, came alive with shipyards and economic activity. It does not have the hustle and bustle of a big city but its industrial base is large enough that the Perak government finds it suitable to turn it into a full-scale maritime city.

We could debate whether the governance risks outweigh the benefits of having the ships built locally but LCS and its entire supply chain are the only defence project in our recent economic history with the depth and sophistication of what we could call a “defence industry”.

Some 350km south of Lumut lies the sprawling campus of Composites Technology Research Malaysia, better known as CTRM, one of the leading manufacturers of aircraft components. Its location in the quiet area of Batu Berendam in Melaka belies its global significance.

As a manufacturer and supplier of composite aerostructure, the critical components that would make an aircraft lighter and more fuel-efficient, CTRM sits at the top of the pyramid of the aerospace industry’s global supply chain, feeding into the final production of Airbus and Boeing aircraft.

It is not just a manifestation of the high-quality standards that CTRM maintains in its operation; it also helps instil confidence in Malaysia as a global hub for investment in the aerospace industry.

At its current stage, the industry — with operations ranging from maintenance, repair and overhaul (MRO) to manufacturing — employs more than 20,000 highly skilled individuals across 240 companies, generating revenues close to RM20 billion and turning Subang, Selangor, into an unofficial aerospace city.

Both the shipbuilder Lumut Naval Shipyard (Lunas) and CTRM may be separated by industries and locations, but they share a common origin.

Lunas, the reincarnation of the demised Boustead Naval Shipyard and PSC Industries, has its origin in Malaysia’s maritime industrial development strategy of the 1990s, while CTRM owes its development to the offset programme as part of a government contract with the British manufacturer, BAE Systems.

Both were born out of defence procurements that became a critical part of the broader strategy to transform the Malaysian economy.

The objective was clear. The purchase of defence assets should not be just that — a purchase — but should yield economic benefits in the form of job creation and industrial development.

In areas where local competencies are available, we should prioritise local production. But for assets where foreign purchase is a must, the clarity of vision and the discipline of all stakeholders to embed local industrial development programmes in major defence procurement become crucial.

It should not just be left to the foreign contractors to decide under the vague promises of technology transfer or offer of partnership for some low-level MRO activities.

It demands our active participation to plan and negotiate which areas of the industries we wish to develop as part of the defence procurement. Offset — or the industrial collaboration programme as it is known in our procurement practice — should not be an afterthought but designed in parallel with the defence contract.

It is this sort of economic mindset that appears to be missing from the way we approach defence procurement today.

A window has opened for us to change course. The government’s current pivot to Türkiye to buy some of our advanced defence assets has presented us with an opportunity to turn the strategic partnership into an industrial development programme for Malaysia.

How this programme ultimately works out would depend on how we design defence procurement and manage the offset programme.

Investment in industrial projects, by its nature, requires long-term visibility of business for it to be financially viable. Industrialists and companies would only consider investing in industrial production if there is clarity that the financial commitment would break even at some point and become profitable in the long term.

Hence, consistency in policies and procurement planning on the part of the government is paramount. They should not be disrupted by leadership change, either in the armed forces or in politics.

One could argue that our defence budget is too small to be turned into a significant industrial project. That is if we take the annual budget as our reference point. But if we multiply that by 30 years of shipbuilding, armoured vehicles and aircraft production, we will be looking at close to a hundred billion ringgit worth of contracts, an economic scale sufficient to drive private investment in local manufacturing capabilities.

As such, the success of any industrial development programme or local production would be dependent on whether the government is willing to commit to a long-term purchase beyond the short procurement cycle of public assets.

Lunas, for example, despite the local engineering competencies, would not find it feasible to invest in shipyard enhancement or in developing its manpower if there is no visibility of future contracts in naval shipbuilding for the next 20 or 30 years.

The same principle applies to foreign contractors if they are to invest in a meaningful local industrial development programme that would produce another CTRM.

Concomitantly, an industrial undertaking of this magnitude would not succeed without the oft-cited whole-of-government approach.

The armed forces and the Ministry of Defence focus on which assets to buy that meet the national defence strategy. They do not and are not expected to wear an economic hat.

The role of turning defence purchases into an undertaking that brings real economic outcomes should lie with other ministries charged with economic and industrial development and agencies such as the Technology Depositories Agency, an inaptly named outfit of the Ministry of Finance, but which has proven successful in designing and managing the industrial development programme for the government non-defence purchases.

As the government embarks on an industrial programme in various fields not seen since the 1990s, the time is ripe for us to take a deeper look at defence procurement and how it could serve as another pillar in our industrial push.

Defence is probably the only industry in which demand is assured. The Latin adage “Si vis pacem, para bellum” (to prepare for peace, you must prepare for war) attributed to the Romans, means that there will always be a buyer of the goods — the government.

For this reason, it would be remiss if we don’t take advantage of an opportunity to design a supply mechanism that brings the most benefits to our economy.

Datuk Nazim Rahman is a former chief executive of LTAT. He was part of the Ministry of Defence core team tasked with formulating the rescue plan for LCS and the defence industry policy in 2022.

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