KUALA LUMPUR (REUTERS) - Spurred by tensions with China, South-east Asian nations are building up their own defence industries, channelling fast-growing military budgets to develop local expertise and lower their dependence on big US and European arms suppliers.

While countries such as Indonesia, Thailand and Malaysia won't do away with big-ticket imports from giants like Airbus Group NV or Lockheed Martin Corp, they are increasingly encouraging domestic defence firms to manufacture hardware locally. With regional defence spending seen rising to US$40 billion (S$50 billion) in 2016, 10 per cent higher than last year, some countries are already developing their own exports.

A domestic defence industry is a long-term economic as well as security goal of varying degree for the 10 Asean countries, spending more on modernising ageing equipment partly to retain the region's military balance. The goal has been given urgency by China's moves in recent months to press disputed claims in oil- and gas-rich waters of the South China Sea, security analysts say.

Asean members have stopped short of explicitly citing Beijing as a reason for beefing up military capability. At a meeting in Myanmar last weekend, Asean foreign ministers again appealed for "self-restraint" in the face of heightened tensions, with no mention of China in a formal communique.

"This drive to ensure sovereignty is now at the foremost of all governments' minds in the region," said Mr Jon Grevatt, Asia Pacific defence industry analyst with IHS Jane's. "Obviously the activity of China has raised the issue of protecting, securing territory." China, whose military spending topped US$145 billion last year according to US estimates, claims about nine-tenths of the South China Sea. It has alarmed South-east Asian diplomats this year with assertive moves like planting a giant, US$1 billion oil rig in waters claimed by Vietnam.

A build-up in China's coastguard fleet has also allowed Beijing to beef up its maritime presence without deploying warships. Some in the region have sought to counter that like-for-like: In a package due to take effect this month, Vietnam has set aside 11.5 trillion dong (S$678.9 million) to be used to buy 32 coastguard and surveillance ships.

South-east Asia's defence spending grew 5 per cent to US$35.9 billion last year, data from the Stockholm International Peace Research Institute (Sipri) showed, and is expected to rise to US$40 billion by 2016. The region's defence spending has more than doubled since 1992, according to Sipri.

Defence procurement in South-east Asia is still dominated by government purchases of big-ticket items like jets or submarines from Western defence suppliers such as Lockheed Martin of the United States, France-based Airbus or Germany's ThyssenKrupp AG . The region became the world's second-largest importer of military equipment and technology after India.

Now, though, from Indonesia radar to Singapore submarines, governments are tilting such purchases to help them develop their own defence expertise. While breaking no records in size or scope, recent deals show a growing trend towards embedding local manufacturing in procurement contracts.

In one example, Malaysia's shipbuilding-to-weaponry group Boustead Heavy Industries Corporation is working with French state-controlled naval contractor DCNS on a 9 billion ringgit (S$3.52 billion) contract for six coastal combat ships for Malaysia's navy - to be built locally.

"We expect to achieve well over 60 per cent in terms of local content and value, and see considerable transfer of technology to ourselves as well as local vendors and suppliers who we work with and cultivate," Mr Ahmad Ramli Mohd Nor, executive deputy chairman and managing director of Boustead Heavy, told Reuters. "Importantly, we will already have IP (intellectual property) rights for the first generation of offshore patrol vessels, and this can provide a platform to tap the international market," he added.

Known as "defence offset" deals, these partnerships can enable countries to carve out domestic defence industries over time. Turkey, for example, has successfully used defence offsets to nurture its domestic industry, whose companies now produce half the country's military equipment.

Indonesia, which has more than doubled its defence spending in the last five years, this year awarded a US$164 million air defence system contract to France's Thales SA. A condition of the deal is that Thales must transfer radar manufacturing skills and knowledge to state-owned Indonesian electronics firm PT LEN Industri.

Similarly, Singapore said late last year it would buy two submarines from ThyssenKrupp Marine Systems in Germany - making the deal conditional on the involvement of local industry in developing combat systems.

Singapore has by far the most advanced defence industry in the region, as well as being one of the world's biggest arms importers.

Singapore has sold defence equipment to countries from Nigeria to Brazil since its first overseas arms sales to Malaysia in 1971. Singapore Technologies Engineering (ST Engineering), the republic's main arms maker, generated sales of US$1.89 billion in 2012 alone, according to Sipri.

In a breakthrough, a unit of ST Engineering also won a S$330 million contract in 2008 to supply armoured troop carriers to Britain - its first such sale to a major Western arms supplier - showing it could compete in the global defence arena in some product categories. "Singapore will agree deals with its foreign suppliers that promote the best interests of both parties, and will not be constrained by lots of regulations and unrealistic expectations," said defence economics professor Ron Matthews at Britain's Cranfield University.

Still, for now the rise of a South-east Asia defence industry won't deter big global players, analysts said. The region's rising defence spending makes it attractive for weapons makers at a time of tight military budgets in Europe and North America.

The regional firms' lack of advanced capability also means they are not currently competing head-on with the big players for big-ticket orders.

Instead, they can play a more complimentary role, focusing on areas such as ammunition, small marine vessels and maintenance. But that could change over time - as Turkey's experience shows - if South-east Asian firms start to compete for orders on the global market. "This is a near-term opportunity for global defence firms and a longer-term challenge," said Mr John Dowdy, senior partner at McKinsey & Company.