Significant direct, indirect benefits of the World Defense Show

The inaugural Saudi edition of the World Defense Show will be an opportunity for the Kingdom to showcase vast opportunities for both the Kingdom and its foreign suppliers. The show will undoubtedly witness major announcements aiming at both Saudi defense industry localization and the much-coveted technology transfer. 

Saudi Arabia’s military expenditure makes it an attractive market for defense contractors. The Kingdom reportedly plans to spend over $20 billion on its military industries, with more than half going into research and development over the next decade.

Several Saudi entities oversee the Kingdom’s military industry and regulate joint ventures with foreign firms and contractors. The General Authority for Military Industries was established in 2017 to oversee procurement. It is the sector’s overall regulator and licensor and also the host of the World Defense Show. The wholly-owned Public Investment Fund subsidiary — the Saudi Arabian Military Industries — SAMI, also launched in 2017, acts as project executor of local and joint military ventures and aims to be among the world’s top 25 military companies by 2030. The General Authority for Defense Development is a new government agency established in 2021, which focuses on research, development, and innovation activities in the fields of technology and defense systems.

The Kingdom aims to localize its defense industry so that 50 percent of military spending is local by 2030, versus the current levels of 2-3 percent. Furthermore, the Kingdom plans to increase military R& D spending from 0.2 percent to around 4 percent by 2030. To achieve this, there has to be a comprehensive coordinated effort among end-users and suppliers to effectively assess and localize Saudi Arabia’s need for ammunition, missiles, aircraft, and weapons systems. To date, the Kingdom has only 7 companies and 2 research centers operating in the national defense industrial sector and SAMI has launched several initiatives to achieve the 50 percent localization target through direct investment and strategic partnerships to enable a world-class transfer of technology and knowledge, and develop a network of closely aligned small and medium enterprises in the defense sector to diversify national economic contribution.

SAMI has acquired existing military service companies such as the Aircraft Accessories and Components Company in 2019 with capabilities in landing gear and hydraulic components etc. It has also established joint ventures with companies like the Spanish Navantia to develop a naval combat management system. The Saudi government-owned Advanced Electronic Co. specializes in the design, development, manufacturing, and repair of advanced industry and military electronic systems and equipment. Other foreign partners are Cockrill CMI Defense, L3 Harris Technologies for electro-optics, integrated mission system, Thales Electronic Systems for radar, sonars, and defense systems, and Lockheed Martin. SAMI has also signed a logistics services agreement with Bahri, a Saudi global leader in logistics and transportation, which supports the localization of defense logistics. 

A valuable defense-related manufacturing initiative has been the launch of SAMI Composites LLC to produce composite aerospace components, besides facilitating technology transfer and creating high-skilled jobs in line with Vision 2030. The company will produce fuselage wing parts and skin panels to establish partnerships with globally renowned Original Equipment Manufacturers. Many benefits arise from producing composite material; besides reducing materials cost and increasing aircraft fuel efficiency through lightweight components, it will also contribute to sustainability, and the potential to serve other industries like transportation, agriculture, and healthcare.

The current state of Saudi Arabia’s industrial ecosystem in aviation shows a solid starting basis for the localization target to be achieved but requires coordination amongst many major Saudi players like Ma’aden, SABIC, Tasnee, and Saudi Aramco to produce metals such as titanium, aluminum, and chemicals, especially composites besides specialized machinery and equipment. All this will help to leverage the Kingdom’s substantial domestic market in both military and civil segments, with around 1,500 aircraft today and 600 planned acquisitions. 

The UAV drone fleet is to increase by around 900. GAMI has signed an agreement with SAMI for the development of a Saudi drone to be named “Sky Guardian” with Prince Sultan Studies and Research Centre to work on developing the drone’s capabilities.

The current military industrialization strategy has not come out of a vacuum but has a long pedigree through the so-called “offset” program which has been overhauled since its launch in 1984 under the Economic Offset Program requesting international contractors to re-invest a percentage of the value-awarded contracts in the Kingdom, with Saudi Arabia the first country of the Gulf Cooperation Council to establish such an offset program followed by the UAE and Kuwait in 1991 and 1994 respectively.

The required localization content has gradually been increased from 35 percent levels to the current 50 percent as the Kingdom developed its local supply chain expertise, not only to advance its national security objectives but also its ambitions to become a knowledge-driven economy. 

The Kingdom aims to increase its share of the top global 20 military offset markets, rising to around 15 percent in 2021. Offsets do work if clear matrices are established, and GAMI has now formulated more precise Industrial Participation Program matrices to assist new OEMs entering the Saudi market, which is to be welcomed and follows Aramco’s successful IKTVA contractor matrices.

To initiate momentum, offset programs can be classified as “direct,” being the most complex, and “indirect.” In the former, the purchasing country joins the selling country to supplement elements of the underlying purchased product through co-production, technology licenses, and other supply arrangements. Indirect offset means the selling nation agrees to assist the importing country in its development and investment strategy in unrelated investments to the original contract items. SAMI can demonstrate to others the successful agreement with Lockheed Martin to assemble 150 Blackhawk military aircraft in Saudi Arabia, valued at $6 billion, through a technology transfer/ licensed production in establishing a viable defense industry capability.

Many reasons have been put forward as to why the first generation offset programs did not achieve their aim, ranging from the lack of progress in identifying “good” investment opportunities as well as multiple levels of foreign, corporate, and government administration they must deal with through a Ministry of Defense coordination office. The establishment of both GAMI and SAMI has ensured that there are now no more excuses from foreign arms suppliers, and this will be evident at the Riyadh World Defense Show. The prospect for a more successful localization offset program is now much brighter. 

• Dr. Mohamed Ramady is a former senior banker and professor of finance and economics, King Fahd University of Petroleum and Minerals, Dhahran.