Opinion: Alternative Denel Restructure Strategy Analysis

1621

The Denel acting/interim Group CEO has stated he cannot stand back and watch Denel capabilities go down the drain. I fully agree with this sentiment. Yet, I think that there are alternative solutions to those in the Denel 5.Y turnaround strategy.

There are many commentators that seem to suggest a cop-out and just liquidate or close Denel down because South Africa doesn’t need a weapons manufacturing industry. However, what is always misunderstood is the following: 1) Denel and the defence industry are the Engineering Hub and Skills incubator for RSA. There are many SMME’s today that are the offspring of this industry. 2) Denel and the defence industry are the reliable guarantors for our defence force and security cluster in times of need, so that the equipment would be available. 3) The Defence Force is just not personnel and equipment but is the insurance policy for the country and a deterrent for potential aggressors. The defence industry is part of this insurance policy.

The Denel 5.Y Strategy is an option, but the country is still funding this solution for 5 years. Can we do better if alternatives are examined?

There is a good basis of published material to present an overview of the needs of the defence industry. There is an Aerospace & Defence Masterplan, Defence Industry Strategy, Defence Sector Charter and the Defence Review 2015.

All of these documents and councils are good and there is good focus on Denel. Yet, Denel has gone nowhere very quickly. This has culminated in the Department of Public Enterprises (DPE) stating the following on 18 August 2021: Denel is financially distressed. Denel 1) has liquidity challenges, 2) is unable to raise required bank guarantees to fund operations, 3) has employees seeking court relief for unpaid salaries, 4) has a loss of critical skills, and 5) has critical capabilities at risk of being lost. The DPE representative is quoted as stating that “A timeous decision on the future and support for Denel is critical”.

So the Denel 5.Y strategy aims to reduce overheads and redundancies; protect, retain and exploit intellectual property; continue research and development; streamline business processes; and develop non-military business technologies. All this while exiting loss-making divisions. This means Department of Public Enterprises (DPE) can authorise, and recommend the sale of businesses within the Denel Group.

The current Denel restructuring goes against the very core of the Aerospace & Defence Masterplan that has Denel as a cornerstone entity. Denel is restructuring in a capability destroying manner. The worrying aspect is that the DPE seems to be fully behind this.

AMD Executive Mr Sandile Ndlovu summarized the A&D Masterplan, which has a vision of an Entrepreneurial State and focussed collaborative action to move forward into growth, as having the goals of 1) increase local production of selected products by 50% from current baseline levels by the end of 2024; 2) improve export sales by 100% from the current baseline by the end of 2022; 3) increase formal employment from current levels by 50% by the end of 2025; 4) retain advanced skills in the ecosystem and 5) double the participation of black and/or women participants in the industry from the current baseline by the end of 2022.

In addition to this we can add that we want to exploit the intellectual property in-country. Government, and taxpayers, do not want to continuously fund loss making state-owned entities like Denel. In effect this means no more bail outs after the new plan is implemented.

These are reasonable goals. The A&D Masterplan looks at 50% job growth from 12,500 jobs to 18,750 jobs. If we assume a low turnover of R1 million per industry job per year, then we have potential of achieving a R20 billion industry per year. They are not stretch goals, like wanting to create an industry with 65,000 jobs as per the Strategic Defence Package offset goal. I would rather like to see a R70 billion industry per year, which is achievable within five years.

With this as background I would like to put forward a solution that is in direct contrast to the views of the Denel acting/interim GCEO. According to an article in the Daily Maverick, Mr. Hlakoane is against introducing private sector players into the ownership of Denel. Why, because “Denel’s operations are different as they are tied to national security as Denel provide arms to the South African National Defence Force.” So, effectively the remaining 120 AMD identified defence industry business entities are not solving national security problems, or supplying critical solutions to provide sovereign and strategic independence.

I provided a Custodian Model in the opinion piece: Denel is Dead, Long Live Denel Capabilities. The model is based on the following elements:

1) The disposal of the Denel business units, or sub capabilities to private entity custodians at zero cost with DPE covering the current Denel liability. 2) Appoint custodians that are majority local owned and meet the Defence Sector Charter requirements. 3) Establish or partner with at least one apprenticeship college supported by the Defence Industry Skills Development Fund. 4) Align with at least one institute of higher learning to promote knowledge expansion and future R&D.

I also proposed a defence sector cluster approach to get maximum industry collaboration. The clusters act similar to the current Special Economic Zones (SEZ), yet are not necessary co-located. I suggest seven clusters each with the potential to generate R10 billion cluster turnover per year within 5 years. 1) C4ISR Enabled Awareness Cluster, 2) R21 Aerospace Manufacturing Cluster, 3) N1 Aerospace and Defence Technology Cluster, 4) Eastern Gauteng Defence Mobility Cluster, 5) Fire-Power, Manoeuvre and Protection Cluster, 6) Cape Maritime and Defence Cluster, 7) KZN Maritime and Defence Cluster. An eighth cluster is a focused element to enhance Armscor and Denel business viability, which is a Defence Facilities & Asset Management Capability.

The Denel 5.Y Strategy innovations that were identified to make sure Denel remained sustainable align well with the Cluster Model.

  • adapting to changing industry and markets; – Cluster Model promotes joint industry effort to penetrate international markets
    • evolve to a commercially driven high performance culture; – Allocate Denel capabilities to private entity custodians to be run in commercial business environment
    • restructuring the balance sheet to ensure financial sustainability; – Disposal of product capabilities, but provide asset management capability to distribute future profit and maintain the complex system integration capability.
    • reduce overheads and redundancies in the cost base; – This is achieved through the disposal of product and component capabilities
    • retain core capabilities (strategic and sovereign) and exit non-core business; – The SA Defence Industry maintains all Denel capabilities. Denel reduces to a System of Systems Integrator.
    • optimise properties portfolio; – Pull the property portfolio up to Denel Asset Management level with view to maximise property returns.
    • access new markets and technologies through smart partnering; – Custodian selection is key. The view is to provide the Denel capabilities as the seed for further growth. The cluster approach is focused on wider South African industry partnering for maximum export impact.
    • reduce reliance on government funding and expand relevance beyond defence markets; – The Custodian model is there specifically to address the reduction of government funding. Government role changes to supporting defence industry.
    • leveraging of IP and strategic capabilities commercially through partnering; – The Custodian model aims to maximise the growth potential within the Denel strategic capabilities and IP.
    • develop new non-military business and technologies; – This is a given with the cluster approach and partnering with specific Higher Learning Institutions, and
    • become the leader in research and development, innovation and technical development. – This is achieved by partnering with Higher Learning Institutions and Apprenticeship Colleges.

The government effort is refocused on supporting the SA Defence Industry capability as a whole. Assistance is provided in supporting export initiatives, industry finance assistance, and buy local solutions for the SANDF. This is structured to supply a profitable defence industry that does not require government bail outs for Denel from the role of the industry integrated structure.

Below is a set of ring-fenced Denel capabilities that would provide industry growth seed investment that can be managed by a Denel Asset Management committee. A set of custodians are indicated based on potential to grow the existing capability offering. This is to show that South Africa has coverage for all of the entities that could be disposed.

Capability Entity Capability Focus Existing Products Cluster Potential Custodian
Armour Systems This is a system house providing integrated weapon system solutions for the Armour segment. -Rooikat and Olifant OEM

-Full Maintenance, repair and overhaul of armour systems

Fire-Power, Manoeuvre and Protection Cluster DCD Protected Vehicles
Artillery Systems This is a system house providing integrated weapon system solutions for the Artillery segment. Various 155mm and 105mm Gun system solutions based on towed, truck mounted or self mobility platforms Fire-Power, Manoeuvre and Protection Cluster Thales South Africa
Infantry Weapons Small and light weapon solutions for defence, security and commercial applications Denel is OEM of various hand guns to 20mm personal weapons Fire-Power, Manoeuvre and Protection Cluster Rippel Effect Systems
Medium Calibre Rapid Fire Weapons Supply of rapid fire cannons and mortar solutions -20mm and 30mm rapid fire cannons

-M10 breech loading 60mm mortar system

Fire-Power, Manoeuvre and Protection Cluster Truvelo Specialised Manu-facturing
Mechatronics Design, development and supply of manned and unmanned turret systems. -Advanced Modular Infantry Combat Turrets

-Mechatronics Turret range

Fire-Power, Manoeuvre and Protection Cluster -Reutech Solutions

-Sandock Austral Defence Engineering

Mechem Focus on explosive clearance solution and future Mechanical & Chemical solutions for defence problems. -Explosive remnants of war (ERW) clearance solutions; specialised canine products and services; and ancillary equipment.

-The Casspir OEM is included in this entity

Fire-Power, Manoeuvre and Protection Cluster Twiga Africa
Infantry Vehicles Manufacture and support of tactical wheeled vehicle solutions for the military and security sectors Range of vehicles from the RG32 4×4 light tactical vehicle to the RG41 8×8 armoured combat vehicle Eastern Gauteng Defence Mobility Cluster OTT Technologies

 

Gear Ratio Design, develop and manufacture drive train solutions for vehicle mobility Various drive train component solutions Eastern Gauteng Defence Mobility Cluster Osprea Logistics
Missile Systems Design, development and supply of advanced tactical missile systems. -Air-to-Air Missiles

-Air-defence Missiles

-Anti-armour Missiles

N1 Aerospace and Defence Technology Cluster Incomar
Stand-off Weapon Systems Design, Development and supply of Stand-off Weapons.

Focus on non-powered gliding solutions for military and commercial application

-Raptor II Long-range, high-precision guide weapon

-Range of strap-on bomb kit systems

N1 Aerospace and Defence Technology Cluster -Jonker Sailplanes

-S-Plane

-Epsilon

Unmanned Air Systems Supply of Unmanned Air System solutions -Seeker range of tactical UAS solutions

-Hungwe range of small UAV’s

N1 Aerospace and Defence Technology Cluster -ALTI-SA

-Bronberg

-Milkor

-Tellumat Defence (Hensoldt)

SpaceTeq Design and development of earth orbiting satellite systems   C4ISR Enabled Awareness Cluster -New Space Systems

-CubeSpace

-Dragonfly Aerospace

-SCS Space

Aeronautical Engineering & Testing Aircraft design & development.

Aircraft integration engineering

Flight testing and operation evaluation

Target training exercises

-Weapons integration and release testing

-The SKUA product and the OTB are included in this business unit.

R21 Aerospace Manu-facturing Cluster TFASA
Air Lift Systems Full support capability for air lift platforms applied in a military, security and cargo commercial applications

 

Fixed Wing Airlift

C130, etc

 

Rotary Wing Airlift

Oryx, etc

-C130 certified support centre

-Oryx OEM and full support

Super Puma, Puma A109, BO 105, AS350 Squirrel and Bell 407 MRO capabilities

-Aircraft Cargo conversions

R21 Aerospace Manu-facturing Cluster Tau Aerospace
Air Combat Systems Full support capability for air combat platforms and the airborne weapon systems

Fixed Wing Combat

Cheetah, Gripen, Hawk

 

Rotary Wing Combat

Rooivalk, Mi-17

-Cheetah and Rooivalk OEM and full support

-Hawk and Gripen fast jet and Mi-8 and Mi-17 MRO capabilities and weapon system integration modifications

R21 Aerospace Manu-facturing Cluster Paramount Advanced Technologies
SA Composite Structures Design and supply of complex composite structures for aviation applications Full in-house design, development, test and certification of composite aerospace structures R21 Aerospace Manu-facturing Cluster Aerosud
PMP Integrated manufacturer of small- and medium-calibre ammunition, brass products, detonics, power cartridges and mining drill-bits Wide range of small to medium calibre ammunition Fire-Power, Manoeuvre and Protection Cluster RDM
Cyber Security Systems Cyber Security operation centre solutions for protection against cyber threats Denel Tactical Cyber Command Centre (DTC3) C4ISR Enabled Awareness Cluster -Global Command & Control Technology

 

The remaining Denel entities would then be:

Denel Capability Capability Focus Existing Capabilities Cluster Potential Custodian
Denel SOE The new Denel SOE provides an asset management function.

Manage the capability investments transferred to industry custodians.

The property portfolio is integrated at Denel Asset Management level

Control of the Denel group of capability and property investments. Defence Facilities & Asset Management Capability No Custodian

 

Potential to merge the Denel Asset Management capability with the Armscor asset management capability.

This would absorb certain Armscor functions into the Denel structure.

Denel Integrated System Solutions C4ISR systems integration and System of System integration projects for the SANDF Full systems integration capability.

 

Integration systems from the Denel investment portfolio on a first right of refusal basis.

 

NOTE: Hoefyster Programme transfers to this entity

C4ISR Enabled Awareness Cluster Keep internal to Denel.

This is the core function of the new Denel.

Provide the bridge between industry and the SANDF system deployment for complex main equipment solutions.

This capability would absorb the current Armscor engineering capability

Denel Training Academy Aviation and Engineering apprenticeship training institute Courses are approved and accredited by the South African Civil Aviation Authority (SACAA), the Transport Education and Training Authority (TETA) and the Manufacturing, Engineering and Related Services Training Authority (merSETA) to offer training in accordance with the Competency-Based Modular Training system R21 Aerospace Manufacturing Cluster Keep internal to Denel.

If an external partner is desired then TAU Aerospace or Paramount Training Academy offers growth potential

 



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.