Important direct and indirect benefits of the World Defense Show

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

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

Several Saudi entities oversee the Kingdom’s military industry and regulate joint ventures with foreign companies and contractors. The General Authority for Military Industries was established in 2017 to oversee procurement. It is the global regulator and licensor of the industry and also host of the World Defense Show. The 100% subsidiary of the Public Investment Fund – Saudi Arabian Military Industries – SAMI, also launched in 2017, acts as the project executor of local and joint military companies and aims to be among the top 25 military companies in the world. world by 2030. The General Authority for Defense Development is a new government agency created in 2021, which focuses on research, development and innovation activities in the fields of defense technology and systems.

The Kingdom aims to localize its defense industry so that 50% of military spending will be local by 2030, up from current levels of 2-3%. Additionally, the Kingdom plans to increase military R&D spending by 0.2% to approximately 4% by 2030. To achieve this, there must be a comprehensive coordinated effort between end users and vendors to assess and effectively locate Saudi Arabia’s requirements for ammunition, missiles, aircraft and weapon 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% localization target through direct investments and strategic partnerships. to enable world-class technology and knowledge transfer. , and develop a network of closely aligned small and medium enterprises in the defense sector to diversify the national economic contribution.

SAMI acquired existing military service companies such as aircraft accessories and components company in 2019 with capabilities in landing gear and hydraulic components etc. It has also created joint ventures with companies like Spain’s Navantia to develop a naval combat management system. Advanced Electronic Co., owned by the Saudi government, specializes in the design, development, manufacture and repair of advanced industrial and military electronic systems and equipment. The other foreign partners are Cockrill CMI Defence, L3 Harris Technologies for electro-optics, the integrated mission system, Thales Electronic Systems for radars, sonars and defense systems, and Lockheed Martin. SAMI has also signed a logistics services agreement with Bahri, a Saudi global leader in logistics and transport, which supports the localization of defense logistics.

A valuable defence-related manufacturing initiative was the launch of SAMI Composites LLC to produce composite aerospace components, in addition to facilitating technology transfer and creating highly skilled jobs in line with Vision 2030. The company will produce parts fuselage wing and skin panels to build partnerships. with world-renowned original equipment manufacturers. Many benefits arise from the production of composite materials; in addition to reducing material cost and increasing aircraft fuel efficiency through lightweight components, it will also contribute to durability and the potential to serve other industries such as transportation, agriculture and healthcare.

The current state of Saudi Arabia’s industrial ecosystem in aviation shows a solid base from which to achieve the localization goal, but requires coordination among many major Saudi players such as Ma’aden, SABIC, Tasnee and Saudi Aramco to produce metals such as titanium, aluminum, and chemicals, especially composites in addition to specialized machinery and equipment. All of this will help leverage the Kingdom’s large domestic market in the military and civilian segments, with around 1,500 aircraft today and 600 acquisitions planned.

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

The current military industrialization strategy has not emerged from a vacuum, but has a long pedigree through the so-called “compensation” program which has been revamped since its launch in 1984 under the economic compensation program asking international contractors to reinvest a percentage of awarded contracts by value in the Kingdom, with Saudi Arabia being the first Gulf Cooperation Council country to establish such an offset program, followed by the United Arab Emirates and Kuwait in 1991 and 1994 respectively.

Required localization content has been gradually increased from the current 35% to 50% as the Kingdom develops its local supply chain expertise, not only to advance its national security objectives, but also its ambitions to become a knowledge-based economy.

The Kingdom aims to increase its share of the world’s top 20 military offset markets to around 15% in 2021. Offsets work if clear matrices are established, and GAMI has now formulated more precise industrial participation program matrices to help new OEMs to enter the market. The Saudi market, which is to be welcomed and follows Aramco’s successful IKTVA contractor dies.

To initiate a dynamic, compensation programs can be classified as “direct”, being the most complex, and “indirect”. In the first case, the buying country joins the selling country to complete elements of the underlying purchased product through co-production, technology licensing and other supply agreements. Indirect compensation means that the selling country agrees to help the importing country in its development and investment strategy in investments unrelated to the elements of the initial contract. SAMI can demonstrate to others the successful agreement with Lockheed Martin to assemble 150 Blackhawk military aircraft in Saudi Arabia, worth $6 billion, through technology transfer/licensed production in the facility. a viable defense industry capability.

Many reasons have been advanced as to why first-generation offset programs failed to achieve their goal, ranging from lack of progress in identifying “good” investment opportunities to multiple levels of foreign administration, company and government with which they must deal through a coordination office of the Ministry of Defence. The creation of GAMI and SAMI has ensured that there are no more excuses from foreign arms suppliers, and this will be evident at the Riyadh World Defense Show. The prospect of a more successful location compensation program is now much brighter.

• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran.

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