Denel, and the South African defence industry as a whole, have to look increasingly outwards for growth as the domestic market dries up, the state-owned defence conglomerate believes.
In it’s just-published 2019/20 annual report, the company states that although its main purpose is to support the activities of the South African National Defence Force (SANDF), the domestic market is shrinking and much of its R13 billion order book is from outside the country.
The SANDF comprises around half of Denel’s revenue and South African Department of Defence money assists with developing key products, which Denel leverages when pursuing foreign business. However, the current defence and security budget is 1.1 % of the gross domestic product (GDP), which is low compared to international norms, sitting at around 2.5%.
“While the relatively low defence spend places pressure on Denel to find export clients to maintain capability and be sustainable, it provides a base load, together with investment in new technologies. The technology is important when pursuing export business. The export business provides critical mass to sustain strategic and sovereign defence capabilities,” Denel stated.
As the local defence budget has been continuously cut and many fewer projects and defence activities are available in the local market, the South African defence markets have therefore been depressed for a number of years, with the last major capital expenditure projects being for patrol vessels, which are also slowly coming to an end. No major exciting capex projects are on the immediate horizon, Denel reports.
“Denel, as well as the rest of the South African defence industry, increasingly has to put its focus and efforts on winning export contracts for its continued survival. Denel and the rest of the SADI [South African Defence Industry] have always fielded a niche market where customers would not buy from the European, USA or Israeli suppliers. Denel, however, has too much reliance on the Middle East countries and should further expand and spread the risk by expanding to the Far East, South Asian and Latin American markets.
“Stronger competition with European and USA companies should be expected in markets traditionally serviced by Denel due to contraction in defence spending in their home markets. It is further expected that customers will shift their focus from procuring systems with the highest possible performance to ones that are more affordable. In addition, lower oil prices are likely to affect the cash reserves of some countries and their spending patterns on defence going forward.
“Despite these factors, Denel is experiencing a strong demand for its products in the growth markets of Asia-Pacific and the Middle East. These markets are currently the main export customers for Denel’s products. There are a number of new business opportunities expected to be concluded and executed in the short to medium term,” Denel stated, adding that South Africa is well positioned through its foreign relations in these regions.
“The existing political support from government and its agencies enjoyed by Denel facilitates business development in these markets.”
Business opportunities on the African continent remain largely untapped due to ill-defined user requirements, funding constraints and other hindering dynamics, most of which are political. There are, however, gaps to fill and opportunities to pursue, specifically in the West-African region.
“Denel is in good standing with the United Nations, which provides access to humanitarian and peace-keeping initiatives, with some contracts currently being executed. The Latin American region is still heavily invested in acquisitions of weapon systems and, despite defence cuts, still offers opportunities for Denel. The poor economic outlook for this region is, however, expected to further erode market opportunities,” Denel said.
At the moment Denel is delivering on numerous contracts in the Middle East and Asia. One of the highlights of its 2019/20 report was the delivery of the 100th modular turret for armoured vehicles used by the Malaysian armed forces in terms of a multi-million rand export contract. A thermal imager test and repair facility was inaugurated at Defence Services Sdn Bhd (DSSB) in Nilai, Malaysia. This is the first of its kind in Malaysia and was proudly made possible by Denel.
During the latter part of 2019, Denel Vehicle System signed a significant vehicle contract with a customer in the United Arab Emirates for the manufacture of 33 RG31 vehicles with the potential for future orders.