The definition of a metamorphosis is a complete change. The change can be in character, appearance or condition. The South African Defence Industry (SADI) is in a change phase, much like the pupa phase of a butterfly.
The feasting phase is behind us. At the peak around 1990, the SADI provided direct employment for 130 000 people in around 3 000 companies. The SADI was supported by a government spending around 2.4% of GDP on defence, which equated to a R26 billion local spend.
There has been a declining government spend on defence since the 1990s, which has been offset by the opening up of the international market. This phase was highlighted by the 2015 reported R19 billion earned by SADI entities, while providing direct employment to around 15 000 employees and around 60 000 indirect employees supporting around 120 dedicated defence related companies.
The Defence Review of 2015 acknowledged that the defence sector needed change. A plan was developed with the first phase being to halt the decline. A five year time frame was presented so that the environment would be correct for the ‘butterfly to emerge’.
The SADI entered the pupa phase around 2017. From this time, the SADI has experienced a drop both in local and foreign revenue. This is presenting a case where the SADI entities used the excess energy that was stored to remain viable and structure for a future. This is in direct contradiction to the ambitions presented in the South African Defence Review presented in 2015 where government would have needed to start slowly increasing local funding.
We are now in 2021. The decline is continuing. Defence spending is at a low of around 0.87% of GDP, with the majority of this allocated to the Cost of Employment. There is little funding available for operational costs, and even less for acquisition. This is made worse with the reduction in Special Defence Account (SDA) funding. The SDA reduction means no technology development will take place while this funding is reduced.
Local spending reduction is made worse for the SADI when the country has been scoring own goals in terms of providing significant hurdles for companies operating in the export market. This has helped cause the drastic reduction of export revenues over the last five years.
The defence industry is a high technology sector. Technology development is needed to provide a viable future. The Aerospace & Defence Master Plan released in 2020 puts this technology development element at the core of a future. The challenge is that no visible actions have resulted from the Master Plan.
2021 has thrown in a new dimension for a future SADI. Denel has been the mainstay of the local defence industry. Denel is currently in a difficult situation and is looking less likely to be the major supplier of defence solutions into the future. Unfortunately, Denel has used up all of its excess resources and is now shedding revenue capabilities. This presents a gap for a character change with the private sector positioned to take the lead.
The core problems within SADI are 1) that SADI entities are struggling to retain skilled resources to implement technology, while 2) there is limited government support for the required and necessary SADI export focus. These initial two problems are made more difficult with 3) the lack of financial support for the SADI, especially with respect to unlocking the export focused revenue.
What will the SADI butterfly look like?
Option 1 is that if nothing is done in addressing the problems then SADI does not have a viable future. The total defence capability is then negatively impacted. The decline continues and the defence capability may struggle to meet the national mandate into the future.
Option 2 is the alternative to prepare for a future that is based on the supply of export focused innovative products capable of meeting local needs, with government promoting the SADI offering and providing financing support assistance.
It looks as though there could be political will. This is one portfolio where both the ruling party and the opposition representatives want to add value. The political custodians need to influence the future defence capability spend.
There is a new defence capability leadership. They have an opportunity to create a lasting legacy through providing a viable force structure to meet the country’s needs, while being supported by the SADI. Through this the sovereignty and strategic goals of the country can be achieved.
We have a strong set of academic and NGO entities with knowledge and capability to analyse and assist in formulating future solutions. This grouping needs to be engaged more often.
Lastly, and most importantly, we need to identify a core set of entrepreneurs that would be willing to lead the industry solution. Entrepreneurs focus on identifying and unlocking opportunity with the use of various resources. Carrying on the butterfly analogy, these are the eggs for the future that produce the larva. Government and governmental entities are unfortunately not structured for this key ingredient of opportunity exploitation. Government entities should be structured to support the SADI entities looking to exploit the opportunities on behalf of the country. Without this entrepreneurial element, revert to Option 1.
The second option aligns with recent statements from AMD that projects the potential of expanding industry revenue to R70-80 billion per annum within five years. This is going to require a unique solution backed up by action that needs to start urgently.
My hope is that AMD initiative can harness the potential of some entrepreneurs so that smaller players can also see a future of remaining aligned in this exciting industry.
Written by James Kerr, Orion Consulting CC, which provides Market Entry Strategy and Bid & Proposal services to the Aerospace & Defence related industry and assists international SME mission system product suppliers to gain traction in South Africa. Kerr has assisted various companies to enter, or expand footprint in, the defence industry with air, land and naval systems. He also served as a navigator, and completed an engineering degree, while in the South African Air Force for 13 years.