Publication: Sunday Argus Issued: Date: 2006-10-08 Reporter: Michael Schmidt

Doom and Gloom for Arms Industry



Sunday Argus




Michael Schmidt

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Once the producer of world-class weapons, now a small-part manufacturer, Denel clearly has a lot of catching up to do

The delay in the announcement of whether state arms manufacturer Denel has managed to sell its albatross of a Rooivalk ground-attack helicopter to Turkey - an announcement due last week - has added to the gloom enveloping South Africa's moribund arms industry.

Doves such as Terry Crawford-Browne, of Economists Allied for Arms Reduction, have argued it was patently clear 12 years ago that Denel should have been shut down as an immoral, wasteful and economically unviable industry in the post-sanctions era - while hawks such as Helmoed-Römer Heitman, the southern Africa correspondent for Jane's Defence Weekly, have argued that massive strategic, jobs and skills losses have resulted from the government's failure to support the industry.

Whatever one's take on the problem, one thing is clear: the once proudly independent domestic arms industry is in deep trouble. Denel, alone, having posted an after-tax loss of R1.6 billion in October last year - a third of which can be accounted for by the Rooivalk - has had to rely on a controversial R1.5bn bank guarantee and a R2bn recapitalisation, both provided by the state.

Denel spokesman Sam Basch said this week that the group was forced to reduce its staff from a total of 10 500 two years ago to 8 200 by the end of March this year *1, and would have to reduce it further because of inefficiency.

"As you can see from our financials, we're not out of the woods yet, and CEO Shaun Liebenberg estimates it will take another 24 to 36 months to turn it around," said Basch.

That turn-around strategy, approved by the government in April, involves securing for Denel preferred-supplier status with the SA National Defence Force, working more closely on business and marketing with other state departments, raising productivity and efficiency, focusing on areas of excellence, and finding foreign and local partners.

But it is precisely in its pursuit of the last two pillars of its strategy that things have come unstuck, claims Heitman, who said the government had reneged on its pledge to protect the country's strategic (secure communications and electronic warfare) and niche (mine-protected vehicles and long-range artillery) products.

He said that allowing foreign partners under the strategic arms procurement package to buy controlling interests at "fire-sale" rates in these areas of excellence had firstly undermined the country's strategic security, and, secondly (as with BAE Land Systems' purchase of armoured vehicle specialists OMC), crippled the local defence industry's strong suits, reducing it from a manufacturer of entire systems to one of subcomponents for foreign systems.

Richard Young, the CEO of naval electronic warfare suite producer C²I² Systems, said: "In 1990 I attended a secret conference organised by the University of Potchefstroom and there was discussion about research and development on about 12 major projects such as a new main battle tank, a new twin-engined fighter, various artillery systems, the rocket system to launch the nuclear weapon, and also satellite systems.

"There was also serious consideration about building a corvette and we were designing a Type 206-style submarine based on blueprints that Armscor had illegally purchased during the arms embargo. There was very extensive First World capability - but none of that exists anymore."

Alan Garwood, the head of Britain's Defence Export Services Organisation emphasised that South Africa remained Britain's most significant partner in sub-Saharan Africa - but acknowledged that outside Denel and its aerospace division, the country was viewed as "a developer and supplier, but not of systems and major platforms".

He urged producers such as Denel to market themselves at arms shows such as next year's Defence Systems and Equipment international exhibition in the UK.

"Deals such as the PMP contract could be done again," he said, referring to the landing of a R36 million deal *2 by Denel's Pretoria Metal Pressings to supply 129 million brass cups *3 - the first stage in manufacturing ammunition - to BAE Land Systems.

The problem with benchmarking the PMP deal is that PMP's function is to produce small-arms ammunition at the rate of up to 800 000 rounds a day *4 - not merely the brass blanks from which shell casings are pressed. In other words, PMP has been forced lower down the food chain.

"Twenty years ago we had the ability to launch satellites into low-earth orbit," Young said. "Now Denel is capable of pushing out small pieces of brass for 5.55mm ammunition? That is pathetic, especially given the lip service paid by the ministers of trade and industry, public enterprises and defence to sustaining the defence industry."

So how is the arms industry to pull itself out of the hole? Of assistance may be Liebenberg's approach to trying to consolidate the competing projects of the various local industries into unified projects. The approach of Advanced Technologies and Engineering in refitting Soviet-era tanks such as the T-72 and helicopter gunships such as the Mi-24 Hind with new-generation weapons systems may also help.

But Heitman said there was only one way the industry could be saved at this late stage: embark on a massive programme aimed at rebuilding the SA Army.

A phased re-armament programme would ensure unbroken production lines, which would rebuild areas of niche strength and retain the home-made qualities that once made the industry a force. But the fiscal and political cost of such a rearmament may be heavier than the government is prepared to bear.

With ackowledgements to Michael Schmidt and Sunday Argus.

*1       Until the very early 1990s, Denel was just a part of Armscor which then had a procurement function and a production function. In those days Armscor paid the salaries of nearly 80 000 employees (although it has been often said that not all of them actually worked there).

Now Armscor and Denel combined employ some 10 000 persons in total.

The rest of the defence industry probably used to employ another 100 000 people and now employs just a fraction of that.

The Arms Deal "offsets" programme has created about 2 000 jobs.

So where's The Deal?

*2      Wow!

*3      About 3 months production. What's PMP going to do for the other 9 months of the year and the next 10 years of its life?