Opinion: Economic recovery and the defence industry

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In his statement in early September after the Statistician General, Risenga Maluleke, released quarterly GDP statistics wherein South Africa’s GDP shrunk by 51%, President Cyril Ramaphosa said: “Now is the time to act quickly and boldly to place South Africa on a rapid growth trajectory. We cannot continue with business as usual. We will use this moment of crisis to build a new economy, and unleash South Africa’s true potential”.

It is no wonder therefore that the nation is waiting with bated breath as the President is due to table the draft “economic reconstruction and recovery plan” to parliament on Thursday 15 October 2020. In the meantime, at least 2.2 million people have lost their jobs, and the economy is projected to shrink by at least 8% in 2020. For the defence industry however, the wait is even more agonising since, given historical treatment as the step-child of the economy, it is very probable that the sector will not even feature in such a recovery plan.

It has been a difficult time for local defence companies during the COVID-19 pandemic. The industry was already in ICU even before the pandemic in 2019. The shrinking domestic defence budget, the increase in competing products in the international markets, the collapsing Denel and the unreasonable (anti-business) arms control regime have collectively battered the industry quite badly in the last five years. COVID-19 was therefore the proverbial last straw. Given such a gloomy situation, featuring in the recovery plan would provide the desperately required glimpse of hope for the industry, and hopefully catalyse the process of bouncing back from this dire situation.

Impact of COVID on the defence sector

It has been said that defence companies are not as affected by COVID-19 as commercial aviation entities within the defence and aerospace sector. This is based on the fact that the latter instantly felt the impact of COVID-19 when passengers stopped travelling, aviation operators reduced activities and deferred taking delivery of new aircraft, and maintenance, repair and overhaul (MRO) operators had to cut back as demand plummeted. The former, on the other hand, relies on long-term defence contracts approved a couple of years before COVID-19, and likely to last a couple of years after COVID-19, which reduces uncertainty in the supply chain – the reasoning goes.

In South Africa, however, this has not been the case. We have seen National Treasury re-allocate financial resources meant for defence programmes to other priorities and sectors affected by COVID-19. Critical projects such as Biro (acquisition of inshore patrol vessels), Hotel (acquisition of a hydrographic survey ship for the Navy) and Hoefyster (acquisition of Infantry Combat Vehicles for the Army) are all under-funded now as Treasury has shifted the funds to other priorities. This creates instability and uncertainty in the supply chain, and raises sustainability concerns for the industry. If Treasury could move money away from contracted projects, then how does the industry create certainty in programme management?

The impact of COVID-19 on the local defence industry does not only originate from the internal domestic situation, but it has also come from affected client countries. As more and more tier 1 companies are affected by the lockdown in client countries due to COVID-19, then the lower tier suppliers also suffer since they are unable to move their components and sub-systems. The risk of programme failure increases, thereby taking the entire supply chain down as prime contractors lose big contracts. The result is the entire industry getting into financial distress.

Small, medium and micro-sized enterprises (SMMEs) are always the first to feel the pain and more severely. However, in the defence industry SMMEs can be critical in the supply chain (from the specialist technicians and engineers who work in critical sub-systems, to the niche manufacturing entities that make precision engineering components), as without them no programme can be successfully delivered. It would be prudent therefore for government to pay particular attention to these entities in an effort to prop up the industry during challenging times of economic downturn, as well as during the recovery process.

Countries that have an appreciation of the value of their local defence industries, and specifically the role these have to play in re-igniting their respective economies, have big plans to assist the industries to recover. The Director General of Armament (DGA) Procurement Office in France (the equivalent of Armscor in South Africa), recently set up a task force to support the defence industrial and technology base. The DGA identified 92 small defence firms that were hit the hardest and set up a special unit to support them. The DGA went as far as engaging banks to support the smaller firms with loans pending the awarding of contracts from government. The defence industry in France was further supported by the parliamentary report from the lower house of the National Assembly issued in July 2020, where the need for the recovery plan of the arms industry was emphatically stated.

The role of defence companies in the recovery process

The experience from a handful of local companies that successfully fended off COVID-19 shows that agility and innovation feature prominently in their survival strategy. Agility in this case refers to the entity’s ability to rapidly change course when the circumstances require it to, while maintaining its momentum. Companies that have been able to leverage their capabilities to introduce new ways of doing things within their value chains or operations, have increased their chances of survival. Equally, innovation has played a significant role in many companies surviving COVID-19.

It follows therefore that in the process of economic recovery, science, technology and innovation (STI) will play a significant role. As a significant contributor of STI within the local capability base, the defence industry has a role to play in economic recovery. The industry has experience in developing mission-centric technology solutions required to address emerging threats in the battle space. Such technology solutions have to be developed quite rapidly and be ready for deployment in the operational environment within relatively short periods of time.

The same agility can be applied to develop specific technology solutions to address socio-economic challenges in communities using existing defence technology building blocks in conjunction with commercial-off-the-shelf technologies. We have, for example, seen more and more defence companies venture into manufacture of medical equipment during COVID-19 both locally and abroad. The Denel/CSIR partnership with Defy in the National Ventilator Project is one example. Babcock in the UK is another example of a defence company leveraging technical capabilities to make medical equipment (ventilators) to combat the COVID-19 pandemic. The economic recovery plan should institutionalise such efforts by companies through incentivising this type of agility and innovation.

The other opportunity for defence companies to get involved is in managing large infrastructure projects. We already know that infrastructure projects will certainly form part of the recovery plan that the President is soon to announce, given government’s thrust to use them as a catalyst for re-igniting the economy. The systems engineering process applied in managing large engineering projects in the military can be used to effectively manage any large infrastructure project, and ensure delivery within budget, schedule and quality constraints. This will be especially crucial for the recovery since government’s (including SOEs’) major programme management record does not inspire confidence at all.

Local companies should forge their own recovery plan

So, what should local defence companies do while eagerly awaiting government to announce the recovery plan, which will probably not cater for the defence sector? Instead of crying foul about not being included or catered for in the economic recovery plan, local defence companies should grab the bull by the horns and craft their own future. On one side the defence industry needs to come together and propose a recovery plan to government. Given the fact that there is very little understanding of the sector outside the defence ecosystem, it is even more important now for the key role-players to increase awareness and take things in their own hands in as far as the recovery plan and the future of the defence industry is concerned. A sructures, such as the National Defence Industry Council (NDIC) established within the Ministry of Defence and Military Veterans, is a good platform to lobby the industry position. The industry association, AMD, also needs to be more assertive in fighting the industry’s cause at this juncture.

In parallel to engaging government, the industry should reposition itself and create a conducive environment for a recovery. In the words of the President “it cannot be business as usual”. Defence companies have to shake off the stigma associated with the defence sector by actively demonstrating that they have a bigger role to play in addressing socio-economic challenges currently engulfing our country.

Similar to the National Ventilator Project, the sector should take the lead to spearhead other projects that carry significant socio-economic impacts. One challenge for example that faces municipalities and concerns national government is the provision of clean water to rural communities (including schools). The defence sector has proven technologies for water purification currently used in military operations, and which could be easily re-purposed for non-military applications. Government will, however, not reach out to the sector to ask it to get involved; the sector should push through the cocoon of obliviousness to demonstrate what it has to offer. However, even further than that, companies should reconsider their product portfolio and/or service suite for fitness for purpose in a post-COVID-19 environment and adjust accordingly. Collaborations and partnerships will be crucial in the re-ignited economy.

Looking further afield, as global supply chains recover, OEM and tier 1/2 suppliers will review their dependency on some regions in the world. The impact of COVID-19 in South America and the European Union for example impacted the OEMs in Asia badly in as far as sourcing of components and sub-systems is concerned. It is expected that these OEMs would look for alternative suppliers in Africa and the Middle East where recovery happened quicker. It would be prudent therefore for local companies to position themselves for participation in such lucrative global supply chains. Exports still present the more sustainable option for post-COVID-19 recovery and the eventual thriving of local companies.



Written by Dr Mthobisi Clyde Zondi, Executive Chairman of SanDock Austral.