South Africa's Defence Industry -

Challenges and Prospects

Helmoed Römer Heitman

Helmoed-Römer Heitman is an independent defence analyst, and is also South African correspondent for Jane's Defence Weekly and several other periodicals. He has written several books covering aspects of the South African armed forces. He holds an MA in War Studies from the University of London, and economics and public administration degrees from the University of Cape Town. He has twenty years Citizen Force service behind him, in a wide variety of posts, latterly as a Major on a long-term planning staff.

Published in South African Defence Review Issue No1, 1992

INTRODUCTION

The political and strategic developments of the past three years have brought many changes and challenges. Three changes have had a profound effect on South Africa's current strategic situation: the end of the long counter-insurgency campaign in Namibia; the withdrawal of the Cuban expeditionary force from Angola; and the collapse of Moscow's foreign military adventures.

South Africa is, thus, in the happy situation of no longer being involved in armed conflict, and no longer facing any immediate conventional threat.

That has allowed South Africa to scale down defence expenditure quite drastically. The actual reduction comes to some 17,5 % in 1990/91 and 30 % in 1991/92 once inflation is factored in. That is to say that inflation-adjusted defence expenditure in 1990/91 and in 1991/92 was respectively some R 2 000 million and R 4 000 million less than would have been necessary merely to maintain a constant level of expenditure on the basis of the 1989 budget.

The bulk of these savings were achieved by cutting back the SADF re-equipment program. Some existing programs were stretched out and/or scaled down and a few were cut altogether. Several of the longer-term projects have been frozen, and others canceled. Procurement cuts continue. The latest to become public has been the cancellation of the Navy's plans to have four light frigates built in Durban for some R 2 250 million.

This drastic, and in some areas dangerous, cutting back of the re-equipment program was necessary because there was not much more to be trimmed from operating expenses.

These procurement cuts inevitably had a major negative effect on Armscor and on the wider defence equipment industry. The Armscor group itself has had to retrench some 15 000 of its staff since 1989. Assuming that the cuts will result in roughly proportional retrenchments by the regular sub-contractors as their existing contracts are fulfilled, a further 30 000 to 40 000 jobs are in danger. It is also likely that some of the 1 200 firms supplying items from their normal production, will shed some staff. There will, off course, also be a knock-on effect on other sectors of the economy. The 1992/3 budget suggests that this danger has been recognised, as has the potential loss of technology. The budget has at least stopped the funding slide in cash terms. This will not, however, be enough to prevent some further program and project cuts.

Where does this leave South Africa's defence equipment industry?

South Africa spent much effort and money to build up its defence equipment industry. The result has been an industry able to meet most of the needs of South Africa's armed forces, able to earn a useful amount of foreign currency, and holding within it immense potential to apply its capabilities in other industrial sectors. This is an industry that is much more than merely a support team for the armed forces. It is an important element of the economy, and it holds the potential to pull other elements into the world of high-tech without a long and difficult learning curve.

If South Africa is to continue to earn a return on this investment, and if its potential is to be realised, the industry must first survive the critical challenges facing it now. The single largest immediate challenge is that of defence cuts of such magnitude and imposed so swiftly, that there has been very little time to absorb them efficiently, or to apply the industry to other market areas. If the industry survives these challenges intact, there is immense potential for it and for South Africa - both in defence equipment, and in applying its expertise to much wider markets.

Can the defence equipment industry meet the challenge? Is there a future for industry in this field ?

The answer is yes - if both the government and the industry act rationally and promptly to limit damage caused by the cuts, and to position the industry for the future.

There are three areas to consider in this regard:

South Africa will still need armed forces, and they will need to be re-equipped.



Other countries will also still need armed forces, and South Africa's defence equipment industry is well-placed to supply them with some of their equipment needs.



The defence industry has the potential to turn itself to new, wider markets.

By addressing all three of these areas effectively, to seize the maximum advantage from them, South Africa can ensure that it has a functioning and viable defence equipment industry to equip its armed forces, and can further develop the industry as a national economic asset. Failure to do so, will result in wasting much of the very considerable industrial capability that was built up at great effort and expense. It will also leave the armed forces in a very difficult situation.

The challenge facing the defence industry and the government, is to ensure the survival of the industry so that South Africa will be able to build on it in the future. This will not be an easy challenge to meet. Well met, however, it will bring considerable benefits for South Africa.

EQUIPPING THE SOUTH AFRICAN ARMED FORCES

Firstly and most important is that the developments of the past three years have ended external military operations and effectively removed any immediate military threat. They have not won for South Africa a situation of ever-lasting peace.

The end of the Cold War has not made the world a more peaceful one. What it has actually done, is remove the strong restraining influence of two super powers forcing other countries to more or less "keep in line". The next decade will in all probability see a resurgence of many regional conflicts as fifty-year-old quarrels are dusted off.

Among the first signs that this will indeed be so, have been the collapse and near civil war in what was Yugoslavia; the tensions among the component states of the former Soviet Union; and the tensions between Czechs and Slovaks, in what today calls itself "Czech and Slovakia".

It is also difficult to imagine Saddam Hussein making his bid for Kuwait in the days of the Cold War. His Soviet backers would simply not have allowed it, for it would have been far too dangerous to their own long-term goals. Elsewhere, tension is once again building up between India and Pakistan over several unresolved territorial issues; and between Malaysia, Thailand, Vietnam, the People's Republic of China, and Taiwan, over the Paracels and the Spratley islands.

Africa is also far from peaceful, and has considerable potential for regional conflict as the frictions of colonial borders that ignored ethnic groupings, combine with the problems of failing economies and disintegrating state services. As much of Africa enters a period of internal collapse, there is also a growing possibility that outside powers will again see this continent as an area of opportunity. A new "scramble for Africa" is not an impossibility. That could bring some unexpected players into the region, with consequences that are as yet difficult to calculate with any certainty.

Many in South Africa have long felt that this country is too far away from anywhere to ever become involved in an armed conflict. That was not true in 1914, 1939, 1950 or in 1975. It is not true today, and it is highly unlikely to be true in the future.

South Africa is the de facto regional power of southern Africa, a situation that will be increasingly accepted and recognised in the future. That will bring responsibilities, including security and strategic responsibilities. South Africa certainly could not afford to ignore serious conflicts within the region, or on the borders of the region. Nor could South Africa safely ignore any external power seeking to establish its authority in or adjacent to the region. Quite apart from her regional responsibilities, it will be in South Africa's immediate interest to ensure that this region is prosperous, peaceful and secure.

South Africa might also once again find herself asked to deploy forces to assist allies in another part of the world. The modern world has become so interwoven that South Africa will not easily be able to dodge such a responsibility with impunity.

South Africa must, therefore, develop and maintain armed forces that are strong enough to deter military adventures against her or within the region, to support her regional neighbours, and to enable her to play her part in international operations. These forces must receive equipment that enables them to be effective against modern armed forces. Given the amount of equipment that will "cascade down" from the major powers to the aspiring major and regional powers over the next decade, any assumption that South Africa's armed forces will be able to make do with old equipment, would be at the very least an unsafe one.

The second fact that must be understood in this respect, is that South Africa's armed forces face serious equipment problems:

The Army has no modern air-defence systems, no modern armoured personnel carriers, very few of the effective Rooikat armoured cars and G-6 self-propelled guns. It must also soon replace its Ratel infantry combat vehicle and the Olifant battle tank.



The Air Force faces block-obsolescence of its Mirage F-1s and Cheetahs beginning around 2000 at the latest. It lacks modern maritime patrol aircraft to cover the 3 000 km coastline, its transports are elderly, and it has no combat helicopters to provide effective close support to the Army.



The Navy has no real "blue water" capability, and must replace its strike craft and its submarines by 2005 at the latest.

If South Africa is to still have effective armed forces by 2010, it is, therefore, essential that most of these equipment problems be addressed over the next ten years, in order to have the necessary programs running in time to field the equipment in useful numbers from 2010 onwards. Quite considerable amounts of equipment will, therefore, have to be purchased over the next decade and a half.

There is, thus, a clear need to maintain effective armed forces, and to ensure an effective re-equipment program. The question to be asked next, is where to source this equipment: internally or from foreign manufacturers.

Even brief analysis argues for local development and manufacture as far as possible.

From the purely military point of view, local development and manufacture is to be preferred because:

Local equipment largely frees South Africa from any strategic dependence on potentially unreliable suppliers. One need only think of Switzerland and the Nordic countries, who are only too willing to sell equipment until the buyer faces a threat. Then they stop all supplies, even of spares and ammunition, because they are not allowed to sell into an area of tension.



Locally-developed equipment will be optimised for the actual requirements of the theatre and the armed forces' operational style. Importing equipment would in many cases face the armed forces with a choice between "gold plated" Nato standard, or "designed to sell non-equipment" developed for undemanding customers.



The Rand is already too weak to make major equipment imports a feasible option. Local equipment will therefore allow more effective and efficient application of the available funds.

From the wider economic point of view, local development and manufacture is also to be preferred, because it is a more financially and economically efficient way of equipping the armed forces:

Local development and manufacture is much more expenditure-efficient than importing equipment. The German experience is that more than 50% of money spent on equipment inside Germany will come back to the state in one form of tax or another. It is likely that the situation is very similar in South Africa. Money spent on imported equipment, by contrast, is gone for ever - and is followed by money spent on spares and munitions and, finally, on replacement equipment.



Local development and manufacture will encourage and facilitate the development and establishment of new technologies and techniques in South Africa, as it has done in the past. Many of these have direct, and almost all have indirect, applications outside the defence industry.



Local development and manufacture will generate employment, particularly of skilled and semi-skilled workers. As these are in short supply, local contracts will lead, as they have done in the past, to training programs to the benefit of the wider economy.



Locally produced equipment means that much less drain on the available foreign reserves.

The "bottom line" is that if money must be spent on defence, it makes sense to apply this forced expenditure to the advantage of the economy. Instead of simply being a drain on the resources of the state, defence expenditure can then become a useful tool in establishing new industries and opening up new opportunities.

It thus makes strategic and fiscal sense to concentrate defence purchases within South Africa as far as is possible. Fortunately South Africa can develop and produce most of the equipment that is needed by the armed forces.

That, however, demands a viable defence industry.

That, in turn, demands that the existing core capability is kept alive. And that, in its turn, demands some prompt decisions. The current run-down of defence funding will soon bring the defence industry to a point where its loss of highly-qualified and experienced personnel reaches a critical stage. With few equally challenging positions available in other industries, the best of these skilled people will emigrate. Once lost, their `know-how' and `do-how' will demand much effort, cash and time to recreate. South Africa cannot afford this loss.

The immediate problem is to ensure that the defence industry can survive the current period of defence cut-backs as a functioning and viable industry.

To some extent, South Africa can here follow the example of the major powers by keeping the research and development programs alive despite cuts in current procurement. That will ensure the retention of key personnel and know-how. Some major projects can also be stretched out, not merely to delay the expenditure but to be able to incorporate the latest technology when they do go into final development. Continuing key programs at lower rates of production, as is being done in some areas, may not be ideal, but does keep the manufacturing capability alive. Measures along these lines will enable the industry to keep core capabilities alive for a time. The announcement in the 1992/3 budget that specific funding has been provided to "ensure that the minimum technological capabilities related to critical defence needs are maintained", suggests that the first moves in this direction are being taken.

Additional measures will, however, be necessary if this industry is to remain viable over the medium- and longer-term, until the SADF re-equipment program can be resumed to its full extent.

Fortunately, maintaining a viable defence industry does not have to become an economic problem. Indeed, it can bring some quite interesting benefits. It can bring in valuable foreign currency, and it can spin-off useful capabilities to the wider industrial sector of the economy. Both of these areas must be addressed if the South African defence equipment industry is to survive.

DEFENCE EQUIPMENT EXPORTS

One area in which some immediate steps can be taken, is that of defence equipment exports. Effective export marketing of systems and components already in production for the SADF or for others, can serve both to keep production lines open, and to earn money to fund research and development work for future products. Taken together with a carefully balanced program of continuing work for the SADF, this can go some considerable way towards meeting the short-term needs of the industry. There is also considerable longer-term potential.

There is a wide-spread view that recent political and strategic developments have permanently crippled the international defence equipment market. That seems to be highly unlikely.

The end of the Cold War has brought considerable cuts in defence spending by the major powers and by some of their client states. This has been partly in response to a real lowering of the need to expand or upgrade their armed forces for the time being, and partly in response to public perceptions that there should be a "peace dividend". Perhaps more importantly, this has come as a heaven-sent opportunity to trim government expenditure at a time of economic recession. None of the major powers have, however, made significant cuts in long-term research and development. Not even the former Soviet Union.

The picture among the smaller powers is more varied, although it is clear that the fond notion of "peace in our time" is already wearing a little thin even with those few governments that held it for a time. Governments in those regions where the economic, political and sociological stresses and tensions are very clear, have not even paused in their defence programs. Governments in some other areas are using what they see as a breathing space, to gather their resources or to address urgent needs in other areas before upgrading their forces.

As discussed above, the first signs of a resurgence of regional conflicts are already clear in several parts of the world. There are also clear signs of some potential new tensions, which could develop to a level of hostility if not actual armed conflict. It is an old truism that one should prepare for war if one desires peace. Another old saying has it that "every country has an army - either its own, or somebody else's". This is not lost on many governments, and they are quite clear that a country without the means to defend itself, will attract hostile attention sooner or later.

Thus, while there clearly is a pause in the purchases of defence equipment, it is just and only that: a pause.

The initial pause will be followed by a phase of lower purchases of new equipment as equipment "cascades" down from the super and major powers. This will overlap with a period during which their producers sell new-built equipment at rock-bottom prices to keep their production lines open. Both of these trends are already visible, particularly as regards naval and aviation systems.

The second of these two trends will last only while the current equipment items remain in first-line use. Once new equipment comes into production for the forces of the major powers, their producers will find it difficult to compete with those on the "third tier" of producers, such as the South African defence equipment industry. They will still have to supply `gold-plated' equipment to their armed forces, but in lower quantities. That will make it almost impossible for them to offer it at prices that smaller countries can even consider.

At the same time, these major producers will no longer have the financial resources to develop a second line of simpler, cheaper equipment for export. Nor, with the end of the Cold War competition to win clients and friends, will their governments be inclined to fund the development of specifically export-orientated equipment or its purchase by friendly states, as was done in the past.

The "third tier" of defence equipment industries could then find that they have the "smaller nations" defence market pretty much to themselves until the next lot of second-hand equipment sales. Given the cost of modern equipment, that should be a long way in the future.

The South African defence equipment industry is well-placed to win a sizable portion of this "smaller nations" market:

It has an excellent reputation for producing equipment that actually works under operational conditions - equipment that is effective, tough, and simple to use and maintain.



In many areas it offers a unique blend of "high-tech" concept and practical engineering, resulting in tough, reliable items that offer performance on a par with more complex and fragile equipment from other producers.



It has the technological capacity to develop equipment on the basis of existing items, or even new items to order.



It is one of the few "third tier" producers to have an actual capability to develop, and bring to production status, complete weapons systems.



It enjoys the advantages of a weak Rand.

South Africa's defence equipment industry will have to work hard to succeed, despite its potential advantages. Not only must it expect to face political difficulties for some time to come, there is also no doubt that it will face stiff commercial opposition. That opposition will not always fight on the basis of equipment quality, price, offset deals, and suchlike. It will also bring to bear political pressure whenever it can. The South African defence equipment industry also still has much to learn, particularly as regards local manufacture deals, offsets, and the barter- and counter-trade arrangements in this market. Finally the industry will have to very carefully select market niches in which it enjoys an existing or potential advantage. That will ease its initial penetration into the wider market.

One potentially lucrative niche market might be tactical communications equipment, where the systems developed for the SADF are better- suited to the requirements of many armed forces than are those of other producers. Such equipment is also relatively anonymous, which will remain an important consideration for some time yet.

Another niche would be that of very "basic" equipment - simple and tough items well-suited to even the poorest, least-trained third-world defence force. That is an area with few real competitors. Much of the equipment offered in this category is barely usable rubbish, or not as simple, tough and reliable as claimed. South Africa is well-placed to meet the need for simple equipment that "works as advertised". Much South African defence equipment will more than meet the requirements of most "smaller nations" armed forces, without straining either their budgets or their technical support capabilities.

A third niche that appears to hold out considerable promise, is that of components and sub-systems. These can be sold to upgrade older equipment; to standardise a range of equipment bought from different suppliers (such as armoured vehicles, which might have incompatible radios, different secondary weapons, et al); and to be used in the development of indigenous equipment. These are again items that very few outside the purchasing force will see, let alone recognise. Many of these items will be common to South African systems in service, which will enable them to be offered at reasonable prices even in quite small quantities.

Innovative research and development should also be able to find new applications for some of these items. The key here will lie in identifying the market niches that the very large competitors cannot easily address at reasonable prices, and that are too "high-tech" for some of the other "third tier" industries.

One obvious area is that of bringing equipment sold by former Warsaw Pact countries up to western equipment standard, although this market has already been widely recognised. In this respect, it is the weak Rand that may enable South African firms to carry the field. Neither the supplying nations of eastern Europe, nor the Third World customers can really afford the equivalent items from the major producers. Both ends of this market should, thus, still hold potential for the South African industry.

Yet another area in which the South African industry would enjoy considerable advantages, is that of wheeled combat vehicles. It has vast practical experience of developing, fielding and supporting a wide variety of such vehicles. That is backed up by the very considerable operational experience of the Army, which can be tied in to support both the marketing of existing vehicle families and the development of vehicles to client requirements. There is no other defence equipment industry with a comparable experience base.

The economic potential for South Africa in developing and exploiting these markets is quite considerable. A successful marketing program for existing products should already be able to bring in much valuable foreign currency. A few years ago, the defence industry was South Africa's biggest exporter of finished goods. That achievement was made possible by a major set of contracts that is unlikely be repeated on a like scale in the near future. There is, however, no reason why it should not be possible for the industry to win sufficient smaller contracts to remain a major exporter while it reconnoiters the wider market. Major equipment sales may well also create opportunities for non-defence trade with clients. Counter-trade and offset arrangements will bring a variety of additional opportunities in this regard.

There are, however, two requirements that will have to be met if the industry is to succeed in the export market. First of all it will have to survive, intact, long enough to break into and establish itself in the market. Second, it will have to ensure that it maintains its edge in its market niches, and it will have to develop new areas of expertise.

The first of these requirements can only be met by ensuring that South African defence procurement remains at a sufficiently high level to enable the core elements of the industry to survive the next few years. That, in turn, should enable it to survive the initial defence purchase slump, and to seize the potential opportunities in the "cascading" of equipment by the major powers. Continuing current development projects will also enable the industry to develop a further range of products to take to the market when opportunity beckons. Thus, quite apart from the need to re-equip the South African armed forces themselves, keeping these projects alive is also a key factor in ensuring that the South African defence equipment industry is still there and is ready to take advantage of the markets that will open up later in the decade.

The second requirement will only be met if there is sufficient defence funding over the medium-term to enable further research and development in defence technology. It also requires that the industry applies itself and its capabilities to the wider engineering and electronics market - both in research and development, as well as in the actual manufacturing of goods for the civilian market. Applying its capabilities to the civilian market, will give the industry the solid base to survive over the long-term. Defence equipment sales then become "the gravy".

DIVERSIFICATION

The wider defence equipment industry, consists not only of the Armscor/Denel group but also of many important private contractors. The industry is much more than merely a logistic support organisation for the armed forces. It holds within itself very considerable potential to take South Africa's wider industry into high-tech development and manufacture. This is far too valuable a potential to ignore or to sacrifice. There have already been some spin-offs from the existing defence programs - primarily in steel, electronics, ceramics and quality control systems - and there will be further spin-offs from future defence programs. The greatest potential in this area, however, lies in applying the capabilities of this industry directly to other sectors.

Apart from expanding its defence equipment market, the defence equipment industry must, therefore, also further diversify into other areas altogether, both widening and deepening its range of interests. There is obvious potential in many of the industrial sectors technically related to the defence equipment industry. A careful study of the defence industry's capabilities will reveal many more opportunities, many in co-operation with firms outside the defence sector. Expanding into non-defence work will enable the defence equipment industry to survive, to vastly broaden its base for long-term survival, and to generate profits that can be applied to developing new technologies.

The capabilities that South African industry can "spin-off" from defence work, will also enable it to produce equipment suited to the other needs of developing countries: equipment of all kinds that actually works under very basic conditions, that is simple to maintain, and that developing countries can afford. Much of the technology is already to hand, and the "think tanks" established by the defence industry have the ready capability to develop other interesting concepts in a variety of fields, given the necessary encouragement. This would open a potentially vast market to South African industry, in Africa and elsewhere in the third world.

The private defence contractors will, quite understandably, not wish to make their hard-earned expertise too freely available to other firms in a similar business. There is little, however, to prevent them licensing some of their know-how, or taking on work in their specialised areas for other firms. The former Armscor subsidiaries that are being organised into the new Denel group, are also to be privatised over the long run. They, too, will therefore be very reluctant to freely share expertise that could be critical to their commercial survival. Again, they could be prevailed upon to license some of their expertise and to apply it to specialised work for other firms. Licensing their expertise and carrying out specialised work, will enable these firms to keep their in-house think-tanks alive and active, and will bring useful revenue.

The very extensive "pure" research and development capability of the defence equipment industry, and particularly the think tanks of Armscor and Denel, can very usefully complement that of the CSIR, to expand and extend South African expertise, particularly in engineering, electronics and areas of applied chemistry. Again, applying these capabilities to the civilian market will allow these establishments to be kept operational, will benefit the industry generally, and should generate useful income.

South Africa should perhaps also consider allowing some of those elements of the defence industry that have built a solid base in commercially viable areas, to privatise as soon as possible. One means that suggests itself as well-suited, would be that of the management buy-out. That approach would tend to ensure that the teams are kept together and not broken up to meet the administrative needs of some large corporation. Handled in that or a similar way, the defence industry would not lose the capabilities of these firms, their scientists and engineers would be able to take on civilian projects without complaints of unfair competition and would thus be kept fully occupied, and the state would take in some quite large amounts of cash.

By expanding its manufacturing and its research and development activities beyond the defence equipment sector, the industry can go far towards ensuring its medium-term survival and, in fact, towards laying a foundation for long-term expansion. At the same time, that will do much to help the wider industrial sector and the economy as such.

CONCLUSION

Early in this paper I posed three questions: where does the defence equipment industry stands today; whether it can meet the current challenge; and whether there is a future for industry in defence equipment development and production.

The answer to the first question, is that the heavy defence cuts have faced the defence industry with a critical challenge. It is faced with having to move very rapidly indeed if it is to retain its vital expertise and with it, its potential to seize arising opportunities in the defence equipment market, and then to enter other market areas.

The answer to the second question is a qualified yes. Qualified, because both the government and the industry will have to make a determined and extended effort to ensure the industry's survival despite the current defence cuts. If that effort is not made, it will mean that much of what has been invested in this industry - in effort and money - will be wasted.

The answer to the third question is an unqualified yes - given only that the necessary sustained effort is made, and if the industry pursues its opportunities vigorously. South Africa will then not only be able to retain its important defence equipment industry, it will be in the happy position of having a thriving and growing high-tech industry capable of finding further opportunities in most market areas. This expanded industry and its sub-contractors and suppliers, can then become a vital and invigorating element of economic growth.

The very positive political and strategic developments of the past three years, have presented the defence equipment industry with a difficult challenge: To survive long enough to become a major actor in South Africa's economic growth. It will be a difficult challenge to meet, but the potential is immense.