The Arms Industry, Industrial relations and industrial policy - South African Defence Review No 11, 1993


	The Arms Industry Industrial Relations and Industrial Policy* Dr Bernie L Fanaroff National Secretary (Organizing), National Union of Metalworkers of South Africa (NUMSA) *Edited version of a paper presented at a conference on the Commercialisation of the Defence Industry, hosted by AIC Conferences on 22-23 April 1993 in Pretoria. Published in South African Defence Review Issue No 11, 1993 INTRODUCTION Industrial relations is taking on a new meaning in South Africa. The unions are now central in the development of industrial policies and of strategies for a successful economy. In many areas the unions are in fact leading these developments. We are no longer prepared to limit our scope of interest and activity to dismissals, grievances and wages. This applies as much to the arms industry as it does to other industries. I shall argue in this speech that the future of the arms industry should not be seen as a special case, but rather as an integral part of the strategy for the development of South Africa's manufacturing industry. DEMOCRACY AND THE ARMS INDUSTRY The imminent introduction of democracy in South Africa has many implications for the future of the industry. It is widely recognised that the raison d'être for maintaining a large army, navy and air force has disappeared: in reality, the only raison d'être was the desire to protect apartheid against the majority of the population who wanted to get rid of it. A key part of that strategy was the persistent destabilisation of our neighbours. It will be extremely difficult to convince most of the citizens of our country that there is any likelihood of a substantial external threat now or in the future. In fact, the activities of Military Intelligence have guaranteed that the military will be subjected to the most intensive scrutiny when resources are allocated by a democratic government. It is thus unlikely that there will be much support for the continued acquisition of large amounts of sophisticated weaponry which are appropriate primarily for dealing with external military threats. It is in my view unlikely that the percentage of GDP now devoted to the military will be maintained. Without this large domestic market, I believe that it will be extremely difficult to maintain a competitive position in the world arms market as an exporter. It is made even less likely by: the emergence of new suppliers such as Singapore and Spain; the glut of high technology systems on the market from the East European states; the increasingly competitive market caused by rapidly contracting demand and by recession generally. These factors have led to several mergers among European defence industries, and it has been predicted that only four major European companies will exist by the end of this century, as a result of more mergers. At best the South African industry can hope for niche markets. It then becomes a political decision whether or not the State will support, or indeed allow, the export of weapons. However, there is a second important consequence of the introduction of democracy. Although the industry has been exposed a little, it remains essentially closed and secret. It is extremely difficult to discuss industrial strategies, not only for the arms industry, but also for industries which depend on armaments contracts, such as the electronics industry, if we have very little information about how much is spent on weaponry, what percentage of the work of the electronics industry was on weapon and military systems, what technologies and core capabilities exist, and so on. SUPERVISION OF THE INDUSTRY Beginning in 1990, we argued that Eskom represented a very large public investment. As such, we argued, it was not appropriate that it should be governed by people who represented only a tiny fraction of the interests of the population. We therefore proposed that the trade unions represented in Eskom, as well as the civics, should be represented on the Electricity Council, Eskom's supervisory body. The Minister of Public Enterprises has now in principle agreed to this. I believe that similar considerations apply to most of the arms industry, in both the public and private sectors. The case of Denel is clearest. It is a para-statal corporation, no matter how it is dressed up as a commercial concern. As such, it is a national asset. It is not appropriate, any more than it is for Eskom, that this huge national resource should be governed by people who are unrepresentative of the interests in our society. Denel and Armscor do not seem to be very sensitive to change. In a recent article, a senior Armscor representative writes of the '...insurgency war...' and of '...convincing the enemy...' that a military solution was not viable. Who is this enemy? The people of South Africa? The sooner managers of that sort are no longer in control, the sooner a sensible discussion on the future of the industry can take place. We propose, therefore, that a supervisory board similar to the Electricity Council be appointed, and that it be quite broadly based. This would have the advantage of making Denel sensitive to national development policies. It does not mean that Denel should not be commercially viable. It does mean that Denel's mission statement could be written in a way that acknowledges its position as a national asset. We are also discussing with Eskom the role of trade unions in decision-making within the corporation. Such a discussion must take place also in Denel, for exactly the same reasons. Obviously, trade union organisation is substantially weaker in Denel because of the refusal of the organisation to recognise unions in the past. Given normal facilities, that should not be a problem for long. Denel should not only recognise unions, which it is now clearly prepared to do, but it should also enter into discussions on their role in the company. In short, I am arguing that Denel does not represent a special case because it is involved in armaments production, but it is a special case in that it is a para-statal corporation and a very large national asset. The private sector is a somewhat different matter. Here, too, it is necessary for the industry to come out of the closet if viable strategies are to be worked out, since the private sector is the major part of the industry. Although it is a bit more open in private, publicly it is still extremely coy. The Annual Report of Reunert for 1992, for instance, speaks of '...contraction in our traditional markets...' as virtually the only acknowledgement that it is one of South Africa's major manufacturers of military systems. I am not sure why they are so coy: every worker in Benoni can tell you that OMC makes tanks. Trade union members may not have all the information, but they certainly have or can acquire a lot. It may have been a problem in the past for another company, a multi-national, to admit it was making radios for the Kwa Zulu police. But what is the point of hiding it now? It is our view that these companies, and many others, grew and flourished because they were strategic industries and were given long-term development contracts and cost-plus contracts. They also had a captive market which was not fussy about price or expense. In any logic, free market or otherwise, this means that very substantial quantities of public money were pumped into privately-owned companies in the form of hidden subsidies, primarily to the benefit of the shareholders and of substantially less benefit to the rest of our society. This makes them beholden to the South African public. They can't argue that our role is to make life comfortable for them again, and that they will decide how to use the assets, skills and resources that we paid for. That sort of unilateralism, where the State is seen as a cash cow and the free market will provide jobs, is unacceptable. The free market in South Africa has been extremely unsuccessful in channeling investment into job creation - or even into wealth creation. Manufacturing companies have maintained profitability largely by shrinking our manufacturing base: so they have stayed rich, but the country has become poor. Investors still now prefer to build shopping centres or buy scrip on the JSE or send the money out of the country. It is interesting to note that the government does not seem to have the same reservations about competition between Denel and the private sector arms industry as it does about competition between Abacor and the private sector abattoirs. THE FUTURE OF SOUTH AFRICAN MANUFACTURING There is increasing acceptance around the world of the need for industrial policies. The Japanese and Koreans have never doubted it; the USA and the UK are increasingly accepting it. It is clear from our discussions with the South African Government that there is a large measure of agreement between us on the need for industrial policies to lead South African industry out of the mess it is in now. So, in many ways, business here is increasingly isolated in its naive belief that the taxpayer will continue to simply cough up and leave them to use or misuse the money. The arms industry represents a very large public investment, with features which make it very valuable to the general development of our industrial base: it has the highest level of skills, excellent training facilities and systems, the best technology, the best design and development skills, the best technology acquisition skills, and the most sophisticated machining facilities. Given the considerations that I have set out above, it is clear that the arms industry cannot continue to exist without very substantial diversification. It is of interest to refer here to the McKinsey Report, prepared in 1988 for the National Economic Development Council in the UK, which found that: UK electronics companies were very dependent on defence contracts and were relatively unsuccessful in other areas; there was '...overwhelming evidence...' that companies attuned to defence markets were poorly equipped to cope with competitive markets, in particular because of their relative lack of ability to conceive and create new products, their inability to control manufacturing costs and their inadequate marketing techniques. People close to the industry in South Africa have made remarkably similar comments to me about local companies. We are absolutely convinced that policies and strategies to redevelop our industries, including the arms industry, can only be successful if they are the result of tripartite negotiations aimed at consensus. It is unclear exactly how dependent local companies are on defence contracts, but judging from the major job losses we saw in the 1980's when defence spending was first cut, and now from the parlous state of the electronics industry, I would guess that it is substantial. This is the type of information that industry hides, but it is the type of information that must be revealed if there is to be any sensible discussion on diversification. What is the extent of dependence on defence contracts? What are the core competencies? What are the weaknesses? What skills are available? How many workers are there? How far has the contraction of the industry gone? How far have the skills and capacity already been lost? Obviously, business confidentiality would be respected unless it is contrary to national policy in a specific case. We believe that there should be established an independent, tripartite council to lead and assist diversification. The council should be linked to other key forums, such as the Standing Committee for Electronics of the Department of Trade and Industry, the National Economic Forum, the National Training Board and the Science and Technology Forum which may be established. It should be independent of the State but should be funded by it. Clearly, it must first assess the size and scale of the problem. Clearly, too, it must move quickly to avoid further contraction and loss of skills. This Diversification Council should consider key issues: Research and Development (R & D); human resources; best practices; identification of markets; incentives; cross fertilisation with other sectors; modernisation and investment. R & D R & D spending in South African companies is notoriously low. So is investment in human resource development, including management training, and in new plant. Why is it that the most highly developed R & D capacity is in the arms industry? I believe that it is because the State has been unstinting in its support for both high level skill development and for project R & D in this field. However, it is a particular kind of R & D which is not cost-sensitive in general and which does not have to worry too much about time and price constraints. In his paper, European Procurement Trends in the Nineties: A case for Dual-Use Industry, in issue no 7 of the South African Defence Review, Rupp comments that: weapon systems such as those which have been produced in South Africa normally utilise mature technologies; civilian technology development is much more rapid because of immense competitive pressures. It has long been recognised that the extent to which military technologies spin-off into civil applications is relatively low - at least in part because of lack of incentive. This represents a waste of the huge proportion of scientific and technical expertise and spending which could be put to into the economic development of our country. The Diversification Council should consider which parts of the R & D should continue to be supported, which parts should be drawn into civil co-operative research efforts, and which parts are too specialised to be usefully supported (which does not mean that companies should necessarily be stopped from continuing with such projects if they fund them themselves). HUMAN RESOURCES The Council should consider the retention, retraining and redirection of workers, including managers and engineers or scientists, and a general framework for skill development using the skills already available in this sector and consistent with the schemes being proposed in the new National Training Board and industry training boards. This should aim to relieve the critical skills shortage in manufacturing, project management, the development and design of products and systems, production processes, and software development. BEST PRACTICE The Council should commission an international survey to identify best practices in arms diversification and in comparable sectors in manufacturing and systems development. It should then provide a consulting service to companies, especially those medium-sized and small companies which are faced with collapse as their defence markets disappear. MARKETS It should identify promising markets and should identify mechanisms, including the 'carrot and stick' approach, to encourage companies to enter these markets. The most important is the creation of major domestic markets through very substantial spending on infra-structure projects such as electrification, housing and transport, which is essential to stimulate the development of diversification and of new products and processes which can be exported. Measures such as preferential procurement policies by State and private sector users, assistance with R & D, the establishment of educational resources, off-setting, marketing assistance and similar mechanisms come to mind. Many of these incentives should be made dependent on companies attaining targets of diversification, quality, innovation, cost and delivery on time. The Council should have statutory powers to audit company attainment of targets and to recommend the extension or modification of incentives and targets. Much of this would overlap with what we have already proposed, for instance, in the electronics industry and the car industry and it illustrates the need for integration of proposals and strategies. MODERNISATION It is generally recognised that our manufacturing industries must be restructured and modernised, and we have made proposals for modernisation to the employer associations in the industries in which we organise, including discussion of TQM, lean manufacturing, flattening management hierarchies, autonomous teams, and other mechanisms. Much of this modernisation must consist of investment in human resources, technology, information systems, instrumentation and controls, software, a systems and package approach rather than just an isolated product approach, improvement of design and development skills, and sophisticated machining capacity. The defence industries are ideally suited to provide many of these services to other industries, at least in part as an enabling resource. Collaborative projects are one very important way of making these resources available to the rest of industry. The Council should consider institutional arrangements which would facilitate cross-fertilisation. INDUSTRIAL RELATIONS AT THE FIRM The co-operation of unions in the restructuring of an industry in this way is dependent on certain principles. It is not possible to negotiate policies and strategies without central bargaining forums. The unions cannot negotiate restructuring which leads to the loss of their members' jobs. Cooperation is therefore dependent on agreements on no job loss. Clear frameworks for career paths, training and recognition of skills must be agreed which are also transportable. The benefits of restructuring and of diversification must be ploughed back into growth of the industry and of services, and into further diversification. The main aim must be the creation of sustainable jobs. Necessary information must be disclosed. This would include for instance Denel's return on investment, and the size of its asset base. Facilities must be provided to allow proper consultation with and mandating by union members. Without agreement on these issues, it will be difficult for unions to cooperate in restructuring - but a demoralised and hostile workforce guarantees that restructuring will fail. TRADE UNION RIGHTS FOR THE ARMED FORCES There is a widely held view that the armed forces should in future be professional. If that is so, then joining the forces is a career choice, and there is no obvious reason why the members of the forces, and especially the civilian employees, should not have normal trade union rights. This should apply too, to a conscripted force if that is the way we go. Limitation on trade union rights should be by exception. For instance, the right to strike may require some limitations, but this should be done on the basis of: national debate; the minimum limitation consistent with an efficient and reliable force.