Industry association AMD has painted a bleak portrait of the South African defence industry, as exports, research and development and employee numbers decline, but the association believes problems can be fixed through interventions such as streamlining export processes.
In a presentation to the Joint Standing Committee on Defence last week, Sandile Ndlovu, Executive Director of AMD (SA Aerospace, Maritime and Defence Industries Association) and CEO of the AMD Export Council (SAAMDEC) outlined how the local industry has been declining over the last five years.
SAAMDEC’s presentation stated that industry revenue declined from R19.5 billion in 2016/17 to R12.5 billion in 2019/20; exports declined by almost half from R12 billion to R6.5 billion; and research and development spend dropped from R1.7 billion to R500 million. The number of people employed in the defence industry has also dropped, going from 15 000 in 2016 to 12 500 in 2019.
For comparison, revenue stood at R31 billion in 1990, when R6.1 billion was spent on research and development and the industry employed 130 000 people. Thirty years ago there were some 3 000 companies active in the South African defence industry – that stands at about 120 today. Defence acquisitions have also declined, going from R26.2 billion in 1990 to R11 billion in 2018/19. However, exports grew from R873 million in the mid-1990s to R6.5 billion in 2019/20.
Ndlovu pointed out that exports have been declining since 2016/17, which is a concern as the industry is reliant on exports to survive. “As a country we need to reinforce our ability to export as the local client is not in a position to consume even half of what we are producing as industry.”
Declining local spend
The South African defence budget has been shrinking and stands at R50.5 billion for 2021/22. SAAMDEC noted that the funding shortfall means that the Army, Air Force, Navy and Military Health Services cannot modernise or acquire new equipment and systems, while maintenance, repair and overhauls are falling behind. To have a “technologically advanced military force, capable of executing its functions” as per the Constitution, a strong local industry is key.
The National Treasury has calculated that the recommendations flowing from the Defence Review, if implemented in full, would add R53.03 billion to defence expenditure over the next six years, but this additional funding is highly unlikely.
“Government has expressed its wish to support the defence industry to become export driven on the back of international investment by having a policy stance favouring international joint ventures (JVs) with local industry,” SAAMDEC stated. The South African National Defence Force (SANDF) requires a strong industry in order to ensure sovereign control over key capabilities, security of supply and delivery of customised and cost-effective equipment.
A capable defence industry can also be a useful tool of foreign policy, and the industry can support other government departments and agencies with equipment and services, for instance intelligence services, the Police, the Correctional Services, the Border Management Authority, Home Affairs and Sea Fisheries. “By way of example, the industry has as already cited above contributed immensely to border control, anti-poaching and nature conservation, mine and rail safety as well as water purification all of which are key to the government’s ability to deliver on its mandate which can be enhanced if the sector’s role is supported and enhanced,” SAAMDEC stated.
The Association added that there is still significant and untapped value in the SA defence industry in favour of the country, as 50 000 indirect jobs are supported by the defence industry; import replacement prevents outflows of at least R6 billion in defence, safety and security spend; exports generate R6.5 billion in forex income; and skills and technology are developed.
SAAMDEC would like to see the increased local production of selected aerospace and defence products by 50% from current baseline levels by the end of 2024; the 100% improvement of export sales by the end of 2022; and a 50% increase in employment by the end of 2025.
It believes the industry can thrive if it received direct, deliberate, focused and high-level political support; stable and predictable local defence spending including R&D; a stable and sustainable Denel; an effective arms control regime to facilitate arms export and suitable financing and related instruments.
Improving exports are critical to the survival of the industry, as it depends on exports for more than 50% of total revenue. If exports continue to be constrained, the industry is facing a 40% reduction in workforce, the loss of 25 000 jobs along the supply chain, reputational damage to the South African brand, a reduction in tax revenues and a decline in technology investments – if trends continue, in five years’ time the industry will almost be redundant.
“At more than 60% of South African defence industry revenues, exports are effectively the only and primary market for the immediate and sustainability of the sector and this should be optimally enabled,” SAAMDEC stated. Unfortunately, the current export framework “continues to hamper the South African defence industry’s competitiveness and ability to successfully export due to inefficiencies, ineffectiveness and unpredictability of the system resulting in loss of not only currently contracted exports but future ones as well.”
Challenges include irregular and unpredictable cabinet committee meetings, the Directorate Conventional Arms Control (DCAC) permit application system and the poor resourcing of the DCAC.
“If unresolved, the national strategic and economic/industrial impact of this framework will leave SA without the jobs in this sector, the critical skills will also disappear and so will the forex revenues, tax contribution, sovereign intellectual property and even global political/diplomatic influence.”
Ndlovu added that the National Conventional Arms Control Committee (NCACC) is moving to a digital system, which is an improvement, but companies need quick decisions from the NCACC on exports, even if they are a ‘no’. At the moment the NCACC is deliberating on R1.2 billion worth of contracts.
The slow pace of export approvals and the previous requirement for strict end user certificates and client site inspections has damaged the South African defence industry’s brand across the world. SAAMDEC noted that the Middle Eastern market has been particularly hard hit. Ndlovu said that customers are not interested in future contracts as the industry is struggling to deliver on current contracts. Lost opportunities in the Middle East are estimated to be worth R20.5 billion. Denel alone stands to lose R2.7 billion worth of opportunities over five years.
Saudi Arabia, United Arab Emirates, Oman, Kuwait and Jordan present a special challenge to the industry as the current impasse has resulted in the cancellation or stalling on negotiations for future contracts. “This has jeopardised our standing as an industry and country in the countries mentioned,” SAAMDEC told the JSCD.
SAAMDEC suggested a number of solutions to the industry’s challenges, including state support for defence sales, as countries like France implement. Other fixes include:
Brand reputation management with the crisis specifically in the Middle East region and a number of African countries;
Engagement with the Presidency on the implications and image of the country;
Instruments used by the state should support defence industry exports (NCACC);
The NCACC approval process needs to be digitised, fast-tracked and benchmarked with other countries to ensure competitiveness; and
Interim measure need to be implemented to allow the industry to operate during emergency periods and election cycles as the export process grinds to a halt during elections and changes of administration.
Another intervention is for certain products and capabilities to be localised, including command and control technologies; communications intelligence and cyber intelligence technologies; optical, radar and electronic surveillance and exploitation technologies; data capture, fusion, analysis and dissemination technologies; weapons and ammunition; personal protective equipment; training simulation systems; unmanned vehicle technologies; and vehicles for rural patrol operations.
The defence industry can also support the SANDF and other government departments in border security and other tasks, especially along the Mozambican and Zimbabwean borders. And finally, the South African defence industry, including Armscor, has a large amount of intellectual property that can be exploited and commercialised.
Ndlovu pointed out that South Africa has a unique defence industry that is very appealing to the international defence community. It is very competitive globally and is independent, which sets it apart from the competition and this can be used to its advantage.