Thailand backs down on cancellation of the submarine contract, a cabinet decision made in 2023. Now, it agrees to proceed with the Chinese engine after talks with military representatives and shipbuilders. It signals closer ties with China and indeed, potentially more Chinese-made submarines.

Thailand has backed down in a potential legal tussle with China over the submarine contract cancelled by the cabinet last year. Following a visit by Chinese military and shipbuilding personnel to Bangkok last week, the Ministry of Defence has agreed in principle to proceed with the S26T Yuan Class submarine. The submarine will now be delivered with a Chinese-made engine, which was previously rejected. In short, the decision has been linked to the consideration and desire in Bangkok to maintain a good relationship with Beijing. Certainly, it also signals a strengthening of Thailand’s naval relationship with the People’s Liberation Army (PLA) Navy.

Minister of Defence Sutin Klangsaeng, took part in the talks between Chinese and Thai negotiators on Wednesday. He now accepts a reversal of the October 2023 decision, ratified by the cabinet, to cancel the Chinese S26T Yuan class submarine contract. This was signed in 2017. It came after China failed to deliver Rolls Royce MTU-396 engines made in Germany.

In Bangkok this week, it was also suggested that the Royal Thai Navy’s plans for two further Chinese-made submarines may be back on the agenda.

This week’s decision certainly reveals a shift in the policy adopted by Prime Minister Srettha Thavisin’s government since taking office last September.

It is thought the reasons for this are trade and a desire to maintain good relations with Beijing.

In a significant development for Thai-Chinese relations, the kingdom has backed down on its October 2023 decision to cancel the 2017 Chinese S26T Yuan Class submarine contract.

Previously, this ran into difficulty when China found it could not honour the original agreement, particularly the supply of a German-made MTU396 diesel-powered engine.

Decision is in line with what the Royal Thai Navy clearly wanted after last year’s last-minute moves by navy top brass to resurrect the sunken sub contract

A definitive decision on this was taken by the Thai cabinet last year. In brief, it came after the Minister of Defence Sutin Klangsaeng recommended the kingdom seek a frigate instead of a submarine.

The decision was upheld despite efforts by the Royal Thai Navy afterwards to claim that previously unreleased communication with China suggested there was no breach of contract.

Thailand paid ฿7 billion out of the ฿13.5 billion required to have the submarine built by a Chinese shipyard in Shanghai.

Representatives of the China Shipbuilding and Offshore International Co (CSOC), a Chinese state-owned firm, are believed to have been in Bangkok this week with a Chinese delegation.

Formerly, a Thai delegation to Beijing saw Prime Minister Srettha Thavisin communicate Thailand’s decision to scrap the submarine deal directly to President Xi Jinping.

At that meeting, which occurred during a visit by the PM in connection with China’s Belt and Road Initiative, the Chinese leader was non-committal in his response.

Thailand cancels Chinese sub, wants credit for a new frigate. Tense talks that could yet go legal
Questions asked about the Thai Chinese visa waiver scheme ahead of high profile visit to Beijing to sign the deal
Change of emphasis ahead of trip by PM Srettha Thavisin to Beijing to talk trade and submarines

Subsequently, it is understood that Thailand has been presented with the threat of legal action.

Certainly, it has been confirmed that a substantial amount of the ฿7 billion already paid by the kingdom would be lost.

Outcome at odds with the 2023 policy and direction pursued by Minister of Defence Sutin Klangsaeng who made the firm decision to scrap the contract

Before this week’s meeting between both countries in Bangkok, Minister of Defence Sutin Klangsaeng appeared to have changed course.

Last week, he suggested two options were possible: firstly, the supply of a frigate plus compensation, and secondly, the alteration of the submarine contract to allow for a Chinese-made CHD620 engine.

Certainly, as far as the Royal Thai Navy was concerned, the latter was the only option. In short, it now appears to have got what it wants.

Undoubtedly, a key factor in the change of mood in Bangkok has been trade pressure from Beijing. Last week, it was reported that Ministry of Commerce officials would be at the meeting.

Deputy Prime Minister Phumtham Wechayachai, who is the Minister, is known to have strong relations with China.

The Commerce Minister has visited the Communist country a number of times since taking up office. This includes a high-profile visit to the 6th China International Import Expo in early November 2023.

Ministry of Commerce’s offset policy on trade may have played a key role in the decision to reevaluate Thailand’s position on the defence procurement deal

After the event, the Thai Deputy PM was full of praise for China.

‘China is offering opportunities to foreign enterprises by allowing them to access its large market and the country’s decision to open its market and implement the Belt and Road Initiative reflects a coordinated effort to connect the world to the global economy,’ Deputy Prime Minister Phumtham told the China Daily. ‘One thing that impressed me most is that China has changed its previous identity of ‘world factory’ to the ‘world market’.’

Certainly, this is understandable given that China is Thailand’s biggest trade partner.

Figures released in 2023 under the ASEAN-China Free Trade Agreement showed that from January to October 2023, Thailand’s total trade with China was $87.62 billion, down by 1%.

Thailand’s exports to China were $28.92 billion. At the same time, it imported a whopping $58.7 billion, leaving a trade deficit with its Communist neighbour of $29.7 billion.

Thailand’s perceived alignment with China on trade and commerce has become a double-edged sword with loss of capital investment mirroring China’s path

This trend is continuing with reports of China dumping excess production on Thai markets. In addition, Thailand is increasingly seen as aligned with Chinese stock market movements and bourses rather than those of Southeast Asia, Asia, or the Western world.

In short, the loss of inward flows of capital to Thailand mirrors the trend in China. At the same time, this is not what is happening in the rest of Southeast Asia.

In short, the kingdom’s close relationship with China is undoubtedly a double-edged sword.

This was further cemented by the Thai-Chinese permanent visa waiver pact, which came into effect on March 1st.

Unquestionably, it has been seen as a key achievement of Mr Srettha’s government so far. Nonetheless, even in January 2024 when it was first announced, it was linked to the Chinese submarine deal.

Furthermore, Thailand is no longer making any secret of the tacit links between trade and defence contracts.

Indeed, Mr Phumtham’s Ministry of Commerce has provided for an offset trade policy linked to defence procurement agreements.

Commerce Ministry officials involved in submarine talks

This, ostensibly, was why Commerce Ministry officials participated in this week’s talks on the submarine purchase.

Afterwards, the news was clear: The ฿13.5 billion submarine is back in the water.

The talks held in Bangkok on Tuesday and Wednesday were led by Colonel Shi Xionging. Colonel Shi is the deputy director of China’s Bureau of Military Equipment and Technical Cooperation (BOMETEC).

Reports suggest that Minister of Defence Sutin Klangsaeng participated in discussions on Wednesday.

The Thai lead in the talks was General Somsak Rungsita. General Somsak chairs a panel at the ministry tasked with finalising the submarine matter.

An anonymous official source in Bangkok this week suggested that this agreement opens the way for Thailand to purchase two further submarines. 

Indeed, that was the original agreement. It was endorsed by the government of General Prayut Chan-Ocha at the time of the first contract in 2017.

The source underlined that the agreement would allow for continued good relations between China and Thailand.

China’s replacement is not an engine but a submarine electric generator, explains a source close to Bangkok talks. Certified by Lloyd’s Register in London

‘The problem has been solved because of good relations between the two countries,’ the source said. ‘The two sides agreed the submarine would be installed with a CHD620 electric generator as a replacement for the German MTU396 engine,’ the source added. ‘The CHD620 is, in fact, a submarine electric generator. It is not meant to serve as an engine.’

Significantly, the Chinese side can point to the certification of its CHD620 engine by London-based Lloyd’s Register.

The prestigious UK firm is part of the Lloyd’s Insurance Group which has operated for over 260 years. It advises on maritime engineering and design.

However, in recent years it has moved to underscore innovation in the industry towards adapting to climate change.

In addition, China pointed to the use of the Chinese alternative engine in a similar submarine sold to Pakistan.

Chinese defence deal must first be approved by China’s Central Military Committee in Beijing. Then at the same time,  Thailand’s Council Of State and Cabinet

Nonetheless, there are still a number of issues left and matters to iron out. The Chinese side has proposed an enhanced compensation package.

In short, this will involve insurance, certification, and better training for Thai naval personnel.

Certainly, this has all the hallmarks of a defence deal. In short, it will increasingly align the Royal Thai Navy with the People’s Liberation Army (PLA) Navy.

Thailand had demanded ฿200 million in compensation, but this was later sidelined in favour of a submarine training simulator.

At the same time, the training and support by Chinese personnel will open access to Thai naval facilities to China.

In short, China’s submarine contracts are seen as a key step towards closer engagement with Beijing. The Communist country is now openly expanding its military reach in the Indo-Pacific. To deny this is no longer plausible.

Near certainty that China now has a naval base on the Gulf of Thailand is coming at a dangerous time

In recent days, China and Cambodia conducted unprecedented naval drills near the Gulf of Thailand.

At the same time, the agreement on the Chinese side must still be accepted by its Central Military Committee.

For instance, the Chinese delegation insists on not using the expression ‘compensation’ in relation to its support package.

Rolls Royce submarine engine blocked by Germany after it was seen to be used in China’s naval expansion programme. Previously covered in a 1989 arms embargo

On the Thai side, the extension of the original breached contract must be referred to the Council of State. In turn, it must be submitted for formal approval by the government in the cabinet.

It is not clear if a cancelled government-to-government contract can be resurrected. Neither are the legal requirements.

The original problem arose when Germany tightened its curbs on the supply of its Rolls Royce-made MTU396 engines.

Previously, such engines were being supplied despite an arms embargo imposed on Beijing after the Tiananmen Square massacre in 1989. Indeed, there was consternation when it was found they were part of China’s rapid naval expansion programme.

Subsequently, a tightening of the restrictions by German authorities followed.

In short, it came with increased tensions between Western states and China. In particular over disputed waters and islands in the South China Sea and Indo-Pacific.

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Further reading:

Move by Navy Chief puts Chinese sub back in the water as he seeks legal clarity on the contract

Thailand cancels Chinese sub, wants credit for a new frigate. Tense talks that could yet go legal

Chinese nuclear-powered sub disaster, 55 dead in the Yellow Sea, a wakeup call for Thailand

Navy may accept Chinese engine in new ฿13.5 billion sub if it gets an older one thrown in for free

Sub call due soon but closer ties between Chinese and Thai navies signalled by top-level visit

War with China is a rising spectre that must be confronted as US General predicts conflict by 2025

Heat turned up over the Sukhothai naval tragedy with 19 thought to have perished and 10 missing

Former Pheu Thai finance minister expresses unease about US regional moves to counter China’s rise