Denel Dynamics awaiting word on JV, local ownership

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Denel Dynamics is still awaiting word on its future: either as a wholly-owned South African company or a joint venture (JV) with a foreign company. Last year there were a number of reports that EADS/BAE Systems Finmecannica JV missile house MBDA would take a 51% stake in the company in line with similar JVs involving other Denel subsidiaries.

CE Jan Wessels says there has been much a discussion on the matter in political circles over the last few months: should Denel Dynamics “be shared with an international partner or should it be kept 100% local because its missile business is such a strategic capability.”
“That decision has not been made,” says Wessels. “There is a difference of opinion on the one hand between Treasury and the Department of Public Enterprises (DPE), who want to see commercially viable solutions to the business challenges and the DoD (Department of Defence) on the other hand who take a long term strategic capability view… and our business is currently in the middle of this debate. That is fine, that’s how it is today.
“We have given the stakeholder all the options, we have given them the alternative. Each one has causes and effects. More money, less money; more this, less that… The fact that our political leaders are now dealing with that, tells me we have done our job; we’ve given them all the options. To us this is a success story. We’ve given them what they need to make a decision and we, as management, will impliment whatever they decide. Our job is to run the company for the shareholder.

According to public domain reports the Denel business unit posted a loss of R38.5 million for the year to March 2009, largely because the high cost of its research-and-development activities are not immediately offset by sales. Wessels has also previously warned that his business’ viability is undermined by its small order book. The SA National Defence Force tended to order small volumes of advanced weapons meaning production runs were too small to offset R&D costs.

Current JVs include Carl Zeiss Optronics, Turbomeca Africa, Denel Saab Aerostructures and Rheinmetall Denel Munition. “The partnerships were entered into to access stable export markets in an environment of reduced domestic defence spend and a global market which is largely closed, with significant consolidation having taken place,” Denel CE Talib Sadik told the Sunday Times newspaper in March.
“They have allowed the country to continue to utilise its [Denel’s] capabilities and have facilitated export earnings. The local businesses involved have been modernised and recapitalised. They have improved market access and resulted in “an immediate increase in self-funded research and development spend”, said Sadik. “Importantly, stability of supply is created for the local defence and security establishment.”

Sadik said Denel was keen to share risks with partners, ensure money was spent on research and development, and make use of outside expertise. The paper said it understood that the missiles business produces 100 missiles a year, 20 of which are sold to the SANDF. MBDA, on the other hand, produces 3000 a year and sells internationally. “Strategic partners give us the international relationships. SA wants 100%, but we can’t afford it,” Sadik said.



He added that where strategic partners were minority stakeholders, they did not show the same commitment as lead partners, the paper added. “We need to find partners internationally and even locally, as the defence force budget is flat.”