As South Africa enters 2024, the state of its defence industry is taking centre stage, urging the need for a comprehensive strategy to propel it forward. The nation finds itself perched on the precipice of opportunity, with four potential arms supply segments capable of generating over $1 billion in revenue each.
2023 ended with two interesting references on defenceWeb. The first was on the SIPRI Top 100 defence businesses and the second that caught my eye was the parliamentary debate on the Portfolio Committee on Defence and Military Veterans and Joint Standing Committee on Defence Joint Study Tour to Germany.
One of the Joint Study Tour’s focusses was studying the management of a defence industry as well as efforts to boost the defence industry’s economic contribution and potential for employment creation. The Tour was earmarked for Egypt, Türkiye and Germany. Only Germany was visited. I would have suggested South Korea from the defence industry and conscription perspectives. It is positive to note that the Committees observed the importance of a vibrant domestic defence industry, its potential economic contributions and strategic value to the state’s defence readiness.
Germany has four entities in the SIPRI Top 100 defence companies (Rheinmetall, ThyssenKrupp, Hensoldt and Diehl). Important to note is that the German government only has shareholding in Hensoldt, out of the big four local arms manufacturers. The German defence industry supports local and European defence capabilities while offering Germany the potential of full strategic independence. The German defence industry promotes innovation across multiple related dual use industries.
The SIPRI study of defence businesses provides an interesting input on newer countries with defence solution supply aspirations. Total worldwide arms related revenue was $597 billion for 2022. I examined South Korea and Türkiye, which both have four companies represented on the list. South African defence industry (SADI) structure and timelines are relatively close to these countries.
The four biggest South Korean companies are all listed entities (Hanwha Aerospace, LIG Nex 1, Korea Aerospace Industries and Hyundia Rotem). The seed of most of the entities was via state support, but driven by entrepreneurial entities. Their goal is to achieve the potential of strategic independence if required, while still interacting with global partners.
Türkiye has a structure where the Turkish Armed Forces Foundation (think something similar to Denel) has a majority shareholding in Aselsan, Turkish Aerospace Industries and Roketsan. This provides the government the opportunity for guiding industry to achieve potential strategic independence, while projecting Turkish industry capabilities to gain influence. Baykar, now the largest revenue entity of the Turkish big four, is a private defence company, but has benefitted from government contractual support to prove products.
Key to both South Korea and Türkiye is that the government has realised the economic potential and strategic value of a vibrant defence industry. The figures support each of the country’s focus on Arms supply.
|Top 4 Arms Revenue
|GDP – 2022
|Arms % of GDP
|% of World Arms
As recently as 2010/11, South Africa was sitting at around 0.5% of world arms production. The table above shows that the SADI has regressed in arm manufacturer status. This can be attributed to lack of implementation of a defence industry strategy. This is decreasing the SADI’s potential to guarantee strategic independence.
The upside is that the SADI has an established core capability across a wide range of arms segments. Critically, building blocks still remain in the sector. The SADI’s long term target (20-30 years) should be at least 1% of world arms supply, with a focus of being strategically independent across the majority of the modern force main equipment. South Africa needs to decide on its stance for the SADI’s investment – and quickly as it seems as though Nigeria is being courted by China and the USA for arms industry establishment on the continent. Egypt has a well established support environment that could quite easily be expanded for growth into production and design capability.
What is needed is a consolidated strategy or plan of action designed to achieve a long-term goal or overall aim. The Aerospace & Defence Masterplan is a start as it aims to uplift the country through the SADI as an apex industry. The problem is that the document is aerospace, not arms focused. The Ministry of Defence needs to take control of this plan, not Public Enterprises, for this implementation to become reality with the benefit of aligning to true strategic independence through a self-sustainable capability that is made viable through business principles.
The SADI’s goal/aim should be to see if there is a chance to: a) Provide a secure and satisfying environment for companies and employees now as well as in the future (based on the SADI, SA National Defence Force and employee passion), b) Provide satisfaction to the market now as well as in the future (provide a best in world solution that also provides element of country strategic independence), and then c) Make money now as well as in the future (understand aerospace and defence as an economic engine that can provide company as well as country benefits of employment, innovation and contribution to the tax base).
Can we find the one big thing that the SA defence industry, with inputs from the SA National Defence Force, can focus on and do better than any other entity in the world?
My input: Meeting Sub-Saharan Africa special operations forces needs. If we could crack this challenge, other developing world countries could apply these less technologically sophisticated solutions that are able to be scaled up for faster production in response to demand surges.
There has been increasing global tensions over the last fifteen years due to the unprecedentedly rapid redistribution of power from the old West to the rising Global South. There is an increasing chance of a “big war”, also the current movement of countries towards nationalism presents an interesting environment that each wants to protect sovereignty own their own. Here is an environment ripe for the supply of defence equipment.
South Africa would stand to benefit through the application of internal technical knowledge and look to product solutions that can unlock maximum semi-skilled job opportunities. This in turn stimulates nascent industries that also use these skills. Importantly, the SADI is unlocking export business, bringing much needed positive balance of payments for our own defence capability. The output could be better integration of SADI products on the continent.
The SADI, and the state, need to understand and reflect on its position in the market. The South African defence industry needs to examine the following four dimensions:
1) What is the structure of the industry? Identify the distinct segments and ask how structurally attractive are the segments. Non-commercial sovereign/strategic elements needed to be integrated with viable capability elements with the understanding that these funding needs are 100% local.
2) Analyse customer value. This means understanding the underlying needs and desired outcomes of customers, as well as the end-user (SA National Defence Force, SA Police Service, Border Management Authority, Correctional Services and Department of Forestry, Fisheries and the Environment). The government need to force through maximum commonality of main equipment across internal security elements.
3) Analyse the relative position of the SADI relative to competition. How do SADI capabilities and SADI costs compare with the competitors? Is there a mechanism for local support to cover premium element for market viability?
These first three dimensions provide input into:
4) Competitive Analysis. The competitive analysis provides a range of predictions of how the SADI thinks competitors will react to a selected “where to play” and “how to win” strategy. The SADI needs to make a country-level strategic choice based on the competitive analysis.
Here is an example of an output of the above process, using special operations forces needs that align with the other government security department requirements:
1) C5I/Electronics/Sensors/Precision Guided Munitions/Space Payloads;
2) Wheeled Armour Vehicles (manned & unmanned)/Artillery/Ammunition/Light Weapons;
3) Close Air Support (manned & unmanned)/Avionics/Utility Class Air Lift (manned & unmanned); and
4) Combat Patrol Vessels & smaller, including Unmanned Surface Vessels/Support Vessels.
There are other niche sovereign capability solutions, but these four groupings are +$1 billion segments if well-coordinated as per points 2-4 above. The SADI already has core capabilities in these areas. There are cost competitive ways of competing while offering the country strategic independence in the modern brigade main equipment elements that align with special operations forces needs.
The “how to win” element of a SADI overarching strategy is where major innovation is needed. The funding model (acquisition & operation support) is what most will highlight as a challenge. Funding at an industry level is a current SADI Achilles Heel. In order to compete, production costs may need to be amortised over longer periods. Independent security department main equipment acquisition budgets need to be grouped. Countries with the capability for direct acquisition have started establishing local capabilities, or are looking at such endeavours.
I understand that government would like the state to be the leader in this and can reference Türkiye. The South African state does not have the financial muscle (or desire) to drive the SADI to reach its full potential. The German and South Korean limited ownership model provides a more viable option.
Private Funding Mechanisms may be available if the state and SADI can agree on a coherent policy solution. The return of the Strategic Defence Account is needed for long term prime mission equipment solutions, but expanded to also cover main equipment for other security departments (SA Police Service, Border Management Authority, Correctional Services and Department of Forestry, Fisheries and the Environment).
If the state indicated that a long term capability contract was available, there is a possibility that the total contract value for 20-30 years can be secured with a diversified funding solution. An option could be for four strategic segment funds being established. The state would not be the owner of the fund. I would suggest the state provides minor investment through entities like the Industrial Development Corporation and Development Bank of Southern Africa in order to generate returns in addition to tax windfall. The funding could be a blend of local pension funds and international funding entities (an example could be the BRICS Bank). The local contract is then delivered, but total contract values can be used to fund export production to grow the SADI as a whole. The country wins.
SADI members that agree to be part of the sector elements could then tap into the fund for National Conventional Arms Control Committee (NCACC) approved foreign contracts manufacturing component funds. The rules could be for local build at least 50%, and then the supply contract needs to include a capability support contract for the first use period (suggest 15 years up to mid life upgrade).
The above shows why the Defence Industry Lekgotla should be concluded before the publication of the Revised Level of Defence Ambition. I fear that the Revised Level of Defence Ambition document is going to present defence industry business solutions by people that really do not understand “playing to win”. Keep in mind that Armscor and Denel have not been shining lights as to what makes a profitable business.
As a final point, the output document cannot be another over 100 page document. Business Executives really cannot afford to wade through such an output. The output document should be the agreed solution only, maximum 40 pages.
Written by James Kerr, Orion Consulting CC, which provides Market Entry Strategy and Bid & Proposal services to the Aerospace & Defence related industry and assists international SME mission system product suppliers to gain traction in South Africa.