SA defence industry struggling, but avenues for growth exist

1111

The South African defence industry is struggling to survive amidst a declining local defence budget, stiff competition and poor economic growth, but it is possible to develop new avenues for growth, experts have said.

Speaking at the recent Aerospace, Maritime and Defence virtual conference, National Defence Industry Council (NDIC) Strategy Project Leader and Armscor non-executive director Dr Moses Khanyile said that the South African defence industry has been characterised by ever-declining defence spending amidst poor economic growth and competing socio-economic priorities.

As military sales and exports are a function of defence spending, and defence spending in South Africa has declined to ‘dangerous levels’, this has a negative impact on the industry with the result that the South African National Defence Force (SANDF) is not an anchor client for the industry.

“Skilled labour can hardly be sustained on the current budget,” Khanyile warned. “Even before COVID, many companies had to close down. In 2019 the NDIC conducted a study on companies in distress and concluded that the majority of companies which operate in the strategic and sovereign space were in danger of going under due to the defence budget allocation.”

Even though South Africa’s defence industry punches above its weight in niche areas, exports have taken a serious knock, including due to the liquidity challenges at Denel and the ripple effect this has had on the sector, Khanyile said. Defence exports remain a crucial element of sustainability and global competitiveness for the local industry.

To grow the industry again, a number of interventions need to be made, including consolidation, focussing on niche areas, diversification and leveraging intellectual property, Khanyile said.

Consolidation is particularly important given the industry grappling with the COVID-19 pandemic, and Khanyile suggested a focus on land, maritime, aviation and cyber capabilities. “We have to acknowledge we cannot be everything to everybody. There’s a need to focus on key niche markets in line with our technical strengths and demands of the market.”

“Given ever declining defence spending, marketing should be geared to exports,” which should be driven by political and diplomatic marketing efforts. “We need to ensure better traction regarding military sales on the continent.” In the United Kingdom, for example, defence spending is low but exports are high and the industry does not necessarily rely on a large defence budget to stay afloat.

Khanyile pointed out that the industry is not facing a lack of a market as there are armed conflicts persisting around the globe. For instance, in 2019, of the 32 states that had active armed conflicts, 15 were in sub Saharan Africa. However, competitors and allies “are eating our lunch”.

Another way to grow the industry is to diversify and produce dual use products for the civilian market as well as for the entire security sector, including law enforcement, which uses similar or comparable tools as the defence community, from helicopters to small arms and ammunition.

Khanyile added that the industry has over the years generated a huge amount of intellectual property through Armscor on behalf of the Department of Defence. “The industry could benefit immensely from exploiting that,” he said. “I propose a comprehensive catalogue of intellectual property assets be complied and be made available to local industry. Government should retain ownership but industry can enjoy exploitation of intellectual property assets.”

Another issue that can be addressed is overcoming regulatory hurdles. Khanyile said the recent debacle regarding National Conventional Arms Control Committee (NCACC) end user certificates (EUCs) has resulted in the massive loss of business deals nurtured over many years. “It is crucial there is seamless interface between defence companies and export license officials,” he maintains.

This was echoed by Isaac Motale, CEO of Reutech Solutions, who said that “the reality is the NCACC is not working effectively. Continual postponements are a fact. It’s high time we stand up and say what we’re unhappy with,” as the local industry is losing contracts and credibility as well as jobs due to the NCACC.

Motale added that the problem might not be the NCACC but the government’s outlook as a whole in promoting defence sales. “Does South Africa want a reputable defence industry or not?” he asked. “If you want it you put policy and measures in pace to make sure it’s effective in implementing its orders.”

Christopher Haines, Executive Sales Manager at Hensoldt South Africa noted that for every R1 invested in the aerospace industry, for example, this has a multiplier effect of six. “Government needs to think about this seriously and engage local industry.”

Armscor business assurance executive Advocate Boitshoko Senne said that Armscor is “acutely aware of the unfolding global environment that the defence industries are facing and that budgets are moving towards saving lives and not towards defence technologies.”

This is forcing the local industry to focus on exports. He urged the industry to collaborate and form partnerships and said that Armscor will fulfil its duty to support defence-related industries. He pointed out there are still a few programmes ongoing, such as Projects Biro and Hotel, and there are support contracts.

But, “supporting businesses are no longer getting the projects and the work to support our industry and that is of great concern to us. However, we are engaging with stakeholders to talk to see what we can do.”

“This country is a bastion of technological development and good work…and that’s why we still get interest from all over the world, from Australia to the Netherlands. To this extent Armscor extends its hand to industry and other roleplayers and continues to position itself as a partner.”



Khanyile concluded by saying that implementing any of the interventions he mentioned (consolidation, diversification, overcoming regulatory hurdles etc.) in any combination “will contribute to getting our defence industry to participate meaningfully in the global defence market.”