Things are heating up again in the South China Sea -- and this time we're not talking about China's artificial islands.
In June 2014, China and Vietnam came close to actual war, when a China National Offshore Oil Corp. (NYSE:CEO) oil rig moved into waters claimed by both nations, sparking two months of skirmishing between Chinese and Vietnamese maritime forces. While no actual shots were fired, Vietnam accused China of ramming one of its coast guard vessels and sinking one of its fishing boats. (To which accusation, China responded that Vietnamese boats had rammed its ships "1,400 times.")
In the end, China withdrew its rig from the disputed waters. But Vietnam isn't acting like it believes this situation is resolved. To the contrary, it is preparing for the next confrontation with China by buying new weapons -- from the United States.
Arms merchant to the world
The United States isn't just the world's No. 1 buyer of military weapons, you see. According to the Stockholm International Peace Research Institute, or SIPRI, we're also the biggest seller, "accounting for about 29% of world deliveries" of weapons from 2009 to 2013.
So when Vietnam decided this year that it needed to "arm up" to defend its interests in the South China Sea, it was only logical that it would come to us. And, according to an exclusive report from Reuters , Vietnam has a long shopping list.
To replace a fleet of 100 obsolete Russian MiG-21 fighter jets, for example, Vietnam is looking at fighters from Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT), and weighing them against offerings from Eurofighter and Saab.
Its maritime focus also has Vietnam checking prices on maritime surveillance aircraft, such as Boeing's P-8A Poseidon and Lockheed's C-130 Sea Hercules. Jumping on the drone bandwagon, Vietnam is also shopping for unarmed, unmanned aerial vehicles for surveillance. Details are hazy, but these might include anything from a small Boeing ScanEagle to a larger General Atomics Predator, or even Lockheed Martin's stealthy "Fury" drone.
In the water, Vietnam is buying five 75-foot fast patrol boats from privately held warship builder Metal Shark of Franklin, La., to supplement a navy that already includes three new Russian "Kilo" diesel-electric submarines.
What it means to investors
At last report, the biggest deal that we know about, for which Vietnam has already signed on the dotted line, is its purchase of the five Defiant-class patrol boats from Metal Shark. But billions of dollars of weapons purchases could be coming down the pike soon. Since 2009, Vietnam has already laid out $2.6 billion to buy Russian submarines for its navy, and we have the country's annual military budget pegged at no less than $3.4 billion.
Granted, that's not a huge number when weighed against the American military budget. But in an era of declining U.S. defense spending, every extra million dollars of sales helps. And each fighter jet Lockheed Martin or Boeing, for example, sells to Vietnam, will bring in tens of millions of dollars of revenue for our two leading defense contractors. With both companies currently pegged by S&P Capital IQ for 10% long-term annual earnings growth, those extra millions will help to maintain, or even grow, shareholder profits.