Denel says SEP’s paying off


State arsenal Denel says a series of strategic equity partnerships (SEP’s) it entered into as part of its post-2006 turnaround strategy are meeting with success.
“Today, the defence technology and industrial group can report that the success of three of its most profitable entities, namely Carl Zeiss Optronics (CZO), Turbomeca Africa (TMA) and Rheinmetall Denel Munition (RDM) is a direct result of SEPs with international companies,” the company says.

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 group CE Talib Sadik says says the partnerships have ensured the sustainability of South Africa’s capabilities through major increases in export earnings and improved productivity. “The presence of the strategic equity partners has resulted in the modernisation and recapitalisation of these businesses, increased intellectual property development, the transfer of advanced skills and technology and have helped to grow the South African Defence related industry. The value of this type of SEP cannot therefore be underestimated as a means of creating a strategic platform for South African companies to achieve sustainability and to ensure security of supply for the defence establishment.”

Whilst the majority shareholding in the above SEPs is owned by foreign companies, South Africa remains the main benefactor when it comes to the contributions that have already been facilitated by these partnerships, adds Sadik. “Increased export earnings for the country as a result of improved market access through global supply chain integration, improvement in productivity through modernisation and intellectual property investment and sustainable support to the local industry are some of the major benefits that we have seen. Importantly, business stability has been created for employees and security of supply for the SANDF has improved – critical factors for success. A focus on skills development, as well as an immediate increase in self-funded research and development (R&D) spend, have ensured that Denel and South Africa retains its global competitiveness.
“The successful turnaround of these businesses has also seen an increase in direct export orders for the development of new products and the transfer of technology from abroad. Denel is firmly of the view that the model where the equity partner is in control has ensured business success, improved efficiencies of scale and sustainability,” Sadik adds.

The venture with Turbomeca France (SAFRAN group) in Turbomeca Africa set the benchmark for the SEPs. Sadik explains that the initial stages of restructuring involved investment in new plant and equipment and skills development to produce top-of-the-range products, “This has resulted in the development of a world-class maintenance facility for aerospace helicopter engines and gear box manufacturing, as well as extended overhaul and repair capabilities that have contributed significantly to our country’s technological advancement.” This entity’s financial results have been impressive, with revenue increasing by 123% since the inception of the partnership in 2002.

Carl Zeiss Optronics (CZO) has seen a rapid turnaround towards sustainability. Revenue has increased by 122% since the establishment of the partnership. With 70% of the new entity owned by Carl Zeiss GmbH of Germany, Carl Zeiss has imbued the company with a distinct focus on technology, including a complete overhaul and modernisation of the plant in Irene. The company remains a South African entity, employing only three Germans in its workforce of 286. As such, training and skills development have ensured the empowerment of the local workforce with new expertise. This focus on technology, development and empowerment has enabled CZO to become the worldwide centre of excellence for hand held optical systems. The business is firmly establishing its distinctly South African footprint on the global optronics stage, and is sure to open new opportunities to more markets as it continues the drive for new product development.

Strategic equity partnerships support South Africa’s security organs including the SANDF and the SAPS. Golden Share Agreements are in place for the South African Government, where an uninterrupted supply of goods and services and the retention of the technology, assets and the business activity in the country are required from the partners. The SEP’s view the SANDF, and in the case of Turbomeca Africa and Carl Zeiss Optronics the police, as critical customers and, as such, there is a major focus on achieving contracted delivery and quality.

Rheinmetall Denel Munition (RDM) has turned around after only one year of being operational. The 2009 financial results for RDM will be released at the end of March 2010. The company is undergoing a major investment to upgrade plant and equipment (R250 million over three years) as part of its modernisation drive. New technology has also been brought in by Rheinmetall of Germany to add to the existing technology and knowledge base of munitions capability in the country.

Importantly, RDM was chosen as the leading development centre for a range of products of Rheinmetall Defence in Germany, which confirms the high quality of skills in South Africa and has a direct spin off in terms of the availability of this new world class technology for the SANDF. With the production taking place in RDM, this also ensures better utilisation of the existing facilities and creates export opportunities.

Growth in RDM has also acted as a springboard for growth in the broader local manufacturing industry, due to increased local sub-contracting. Furthermore Rheinmetall’s worldwide marketing structure has opened up new international markets for the South African entity.

The Denel group is confident that further SEP opportunities in selected areas will continue to add impetus to Denel’s turnaround going forward, as well as further contributing to the country’s export revenue, technology and skills development. Importantly, stability of supply is created for the local defence and security establishment. “Where markets are accessible for other Denel entities, such as Mechem’s land mine clearance services, the focus will be on revenue growth, operational excellence and an ongoing efficiency drive” Sadik avers.