State arms manufacturer Denel is worried about the effect of the global recession will have on the defence market.
Writing in the company`s latest annual report, table in Parliament last month, CE Talib Sadik cautioned that the world economic recession will undoubtedly restrict global defence expenditure.
“Given the current economic recession and limited funding for defence products and related support services, market conditions are challenging.”
Sadik last month announced that Denel had made a loss of R544 million for the year to March.
The annual report notes the poor outcome was the result of a R452.6 million loss at Denel Saab Aerostructures and a R38.5 million deficit at Denel Dynamics as well as interest on borrowings of R85.8 million.
“Had it not been for these items, Denel would have been profitable in 2009,” Sadik said in his report.
He noted that Dynamics is currently a “focus area” and that discussions “are underway with a key global missiles company, which is considering acquiring an equity stake in Dynamics Missiles.”
Talk at the Paris Air Show in June suggested this was the European MBDA concern. Subsequent gossip suggested a deal would have been announced this month.
“Dynamics is a low volume, high fixed cost business, which is reliant on continuous technological investment, strong engineering capabilities, efficient contracting and execution of relatively small production runs. The division`s long product development cycles result in a business cycle in excess of five years.
“The DoD assigned strategic relevance to Dynamics as part of Denel`s turnaround strategy. However, the local defence spend is still insufficient to sustain Dynamics, making it highly dependent on its supply of a small number of worldclass products to a limited number of markets.
“During the year, efficiency audits were conducted, which confirmed the required minimum levels of local spend and that the division`s operational processes are efficient. Dynamics` global footprint accounts for about 38.7% (2008: 34.0%) of its overall revenue as exports, with the DISS business being primarily locally focused, while the UAV business is 99.1% export focused.”
Sadik says Denel has also opened negotiations with local and international defence companies “to establish partnerships for business entities such as Dynamics UAVs and DLS (Denel Land Systems).”
Pic: Denel Dynamics’ A-Darter fifth generation air-to-air missile, currently under development as a R1 billion joint venture between SA and Brazil.