Publication: defenceTHINK Issued: Date: 2006-05-17 Reporter: Leon Engelbrecht Reporter:

Denel Still Hoping for a Turkish Delight




Date 2006-05-17


Leon Engelbrecht


South Africa's state-owned arms manufacturer, Denel, expects to know by July whether Turkey will place an order for its Rooivalk attack helicopters in a deal expected to total R12 to R15 billion (US2-3 billion). "Technically, we're looking very good," company chief executive Shaun Liebenberg told Parliament's public enterprises portfolio committee yesterday. "But when you're playing with the big boys, political influences (and) the impact and imperatives around the European Union and the support Turkey would need from some of our competitors could impact on the way we're going. But we're feeling very comfortable that we're looking good as far as that is concerned." Denel expected to have clarity on the sale by the end of July, Liebenberg told the committee. The SA Press Association noted that he extolled the virtues of what they described as "the fighter helicopter", saying poor marketing skills and lacking political support were to blame for none having been sold. "We have to try to make this thing work," Liebenberg added. "We cannot just close it down".

He stressed the need to build a captive domestic market for South Africa's armaments industry, and of political support for the industry to secure export contracts. Domestic demand was the nucleus for success in the defence market, Liebenberg said. Other countries were unlikely to buy an untested product that South Africa's own armed forces had no interest in acquiring. Denel needed to plan with the Department of Defence around the government's future weapons requirements, he added.

Liebenberg announced that negotiations were well underway with a number of companies to enter into "equity partnerships" with nine new separate companies created through Denel's recent unbundling, but still under its holding company umbrella. Potential partners had been identified for each of the nine except the new munitions company, and memoranda of understanding have been signed. The deals were between one and seven months down the pipeline, Liebenberg said. If realised, they would provide the local companies with much needed skills and expose them to broader markets.

Denel needed to realise it was a small company that could not compete with big global players. Instead of building its own 12 helicopters, for example, it should, with a larger partner, build 10 percent of an order for 500 helicopters. (Denel built 12 Rooivalk.)

Having been declared technically insolvent last May, Denel sought R5.17 billion from the government over the next five years -- R3.7 billion to settle old debts and the rest for new plants and equipment. It got R2 billion for the current financial year. The company expected to post a loss in excess of R1 billion for the 2005/06 financial year. Revenue would be about 23 percent down from the previous year. Denel hoped to break even in the fourth financial year from now, Liebenberg said, adding it would have cost three times more to close the company than to save it. He expressed doubts about Denel's ability to grow its revenue line by more than five to ten percent, saying many of its processes and equipment were outdated.

Liebenberg highlighted possible future projects, including a "vehicle programme", likely Project Hoefyster, an infantry fighting vehicle acquisition, in South Africa to the tune of R7 to R8 billion, and a "very big" Middle Eastern project worth between R3 and R5 billion. He stressed the importance of investment in research and development in order to maintain existing expertise such areas as missile development --in which South Africa was considered a world leader. "We need to continue investing or we will fall behind and never catch up again." If it failed to find an equity partner, Denel would need R1 billion from the government to build a new missile or face losing the capability, he added.

Liebenberg said Denel had beefed up its internal audit system, and warned the committee that "skeletons" were likely to emerge from the clean-up process. "You should not be surprised if certain skeletons come up," he said. "You should be patient. We are committed to be transparent, but we also don't want to be smacked every time we put something on the table."

Turning to the African defence market, Liebenberg observed that incompatible weapon technologies were hampering military operations on the continent and would continue to do so in future. Only about five to six percent of the state-owned arms manufacturer's business went to Africa. This was largely because of the budget constraints of governments on the continent and South Africa's arms export regime. African defence spending was generally on old, second-hand and "dumped" technology, while Denel provided "first world type" weaponry, the news agency reported. "It is going to create a problem when you start looking at joint stand-by forces etcetera, when you will not have equipment that is inter-operable ... technologies that don't talk to each other because they come from different eras... Is there an opportunity? Absolutely. We don't see it as a negative," he said, referring to more and more markets opening up through diplomatic interaction. Liebenberg said there were some concerns and frustrations on the part of the industry around the issuing of export permits. Some markets remained closed for "legacy reasons" and the systems had not yet caught up, he told the committee.

Looking at employment, Liebenberg said Denel might need to terminate more than the 750-odd jobs it has already projected to shed by July. An additional 150 to 200 jobs could go as the state-owned arms manufacturer finalises a review of its 12 operating companies in the coming months. The review had yet to be concluded in two or three of the companies, he told committee members. Liebenberg said further jobs could be threatened by the possible closure of Denel's Philippi munitions plant, one of the seven it runs. "Indications at the moment are that there is a likelihood that we might have to close that plant down," Liebenberg said. Assessments were still underway and a final decision had not been taken. Most of the 350 people employed at Philippi, near Cape Town, were likely to be relocated to other plants. Liebenberg said many of the processes at the plant, running at 15 percent of capacity, were duplicated at others and could be transferred.

Liebenberg next underscored the importance of making Denel commercially viable. "The model, the systems and the processes in our company need to change to ensure we become globally competitive." Denel's productivity level stood at US50,000 company earnings per employee, compared to a global US250,000 standard. Of the 750 people Denel had projected to lay off between October last year and this July, about 500 had already left. The company had put social plans in place to minimise the impact on affected workers and provide them with training. Some 250 ex-employees have started their own businesses. Liebenberg thanked organised labour for its support in the processes underway.

As for (race and gender) transformation, he said the company had "failed dismally", and needed to start from scratch. The staff profile was skewed towards those aged 45 and over, with more employees over 60 than under 30. More opportunities had to be opened up for youngsters, but at the same time the company expected a net decline in staff over the next few years. Because of its poor financial state, trained individuals were not lining up for jobs at Denel, Liebenberg added. He also lamented the rate at which Denel was losing skilled staff to other state enterprises, and said poor planning was rendering ineffective the large sums of money spent on bursaries. "Often by the time they qualify, we don't have a position for them."

With acknowledgement to Leon Engelbrecht.