By Peter Apps LONDON (Reuters) - Fuelled by growing strains in Middle East and Asia, global defense spending looks set to rise in 2014 for the first time since the 2008 financial crisis. A study of the world's top 100 arms companies by the Stockholm International Peace Research Institute (SIPRI) this month showed their total arms sales for 2012 falling 4.2 percent from the previous year to $395 billion, their second annual fall. The global defense market remains dominated by western firms, with Lockheed Martin, Boeing, BAE Systems, Raytheon, General Dynamics and Northrop Grumman top in terms of sales. Emerging competitors, however, are clawing their way up the list, particularly in Asia and the former Soviet Union. Chinese firms are excluded from the SIPRI table because of a lack of truly reliable data. If they were included, SIPRI researchers believe 4 to 6 of China's largest state-owned defense conglomerates would be in the top 20 global arms firms and one - aviation firm AVIC - would be in the top 10. China's dramatic military growth and growing tensions over assorted maritime disputes have caused spending elsewhere in the region to be ramped up. "There's no doubt Asia is where it is happening and it shows no sign of stopping," says Mike McDevitt, researcher at the Center for Naval Analyses, a U.S. government-funded body that advises the military. "Other countries in the region are alarmed by China's naval expansion in particular and that is really driving their procurement." According to IHS Jane's, a defense publisher, the Asia-Pacific region is the only part of the world to see military spending grow steadily since 2008. It is expected to be spending some $474 billion annually by the end of the decade, 28 percent of global military spending, up from 24 percent in 2013. China is believed to have more than quadrupled its military spending since 2000 and by 2015 is expected to be outspending Britain, France and Germany combined. Even with Chinese spending stripped out, however, the rest of the Asia-Pacific region is seen overtaking the whole of Western Europe by the same date. In the last two years, Middle East military spending has been rising even faster as Gulf Arab states worry about Iran and their own domestic stability. Last week, International Institute for Strategic Studies, a London think-tank, said it believed Saudi Arabia's defense spending had now reached $59.6 billion, just overtaking Britain to become the world's fourth-largest military spender. Most of the top 15 defense and security budgets as a percentage of GDP are in the Middle East, including Oman, Saudi Arabia, Iraq, Bahrain, Israel, Libya, Algeria, Yemen, Jordan and Iran. GULF, ASIAN FIGHTER COMPETITIONS Other areas of the world are also seeing growth. Russia's defense budget has increased 30 percent since 2008 and is set to rise another 43 percent in the next three years. Military spending in sub-Saharan Africa rose 18 percent in 2013 alone. All that, IHS believes, will push total global spending to $1.547 trillion in 2014 from $1.538 trillion last year, a 0.6 percent increase. By 2021, total spending by NATO nations will fall below non-NATO spending for the first time in decades - a major challenge for Western firms. Most Gulf states seem happy to split their purchases between their major Western allies - often buying the Eurofighter, the French Rafale and U.S. aircraft such as the F-15 simultaneously in an apparent attempt to secure multiple alliances. Asian buyers, however, appear much more likely to buy American - perhaps unsurprising given Washington's importance as an ally. But they also seem keen to strike deals and make sure their own industry also benefits, often through joint ventures. Most of the shipbuilding goes to local yards, although some western firms have won contracts for design work and to supply specialist equipment such as radar. For foreign firms, the most lucrative market remains aircraft. Singapore is upgrading its F-15s and is looking to buy the Lockheed Martin F-35 joint strike fighter. Japan has already placed an order for F-35s and South Korea is expected to finalize an order this month. Singapore and Japan are also considering the V-22 Osprey built by Boeing and Bell Helicopters, a unit of Textron. In a closely watched competition, Malaysia is currently choosing between Boeing's F/A-18, Dassault's Rafale, the Eurofighter Typhoon, and Saab's Gripen. ASIAN, RUSSIAN FIRMS RISE Pentagon officials say they also expect interest in missile defense systems by Lockheed and Raytheon, Boeing's maritime P-8 patrol aircraft and the Boeing KC-46A airborne tanker. South Korea is expected to begin a tanker competition shortly. With its $600 billion defense budget still outstripping the next dozen nations combined, the United States remains the largest market. Even with recent cuts, it still makes up 38 percent of global defense spending, almost twice the total share of the whole of Asia and Australasia. U.S.-based companies still make up 58 percent of total arms and military sales featured in the SIPRI top 100 survey, with those in Western Europe making up another 28 percent. The share of sales going to firms from outside those regions, however, has been rising since 2005, growing 14 percent in 2012 alone. With China's firms discarded, only one other Asian firm made the top 30, Japan's Mitsubishi Heavy Industries. Other smaller companies, however, grew fast in 2012 and are believed to have accelerated further in 2013. Outside Asia, the biggest winners from growing defense spending were Russian companies, their sales growing by 28 percent in 2012 on the back of resurgent domestic military spending as well as exports to a mix of other states. Vietnam has tended to buy Russian as it squares off against China. Russian and Ukrainian firms have also exported large quantities of rifles and ammunition to a host of countries. "The centre of gravity of defense expenditure is expected to continue to shift south and east," said Paul Burton, director of IHS Jane's Aerospace, Defense and Security. "Russia, Asia and the Middle East will provide the impetus for the growth in global military spending." (Reporting by Peter Apps; Editing by Giles Elgood)
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