INTRODUCTION

The defence industry constitutes those companies which are engaged in research, design, development, production, assembly, test maintenance, logistic support and project management of goods and services with specific military use. The customers for these products and services are primarily the South African National Defence Force (SANDF) and the South African Police Services (SAPS), and are generally supplied to both customers via Armscor.

The demand for this industry has been and is still created by the needs of the SANDF, but is limited by the size of the allocation to the defence force in the national defence budget. The local market for these goods and services is totally inflexible and with essentially only one customer, it is a high risk business. The primary mission of the defence industry is to meet the needs of the SANDF as cost-effectively and efficiently as possible, with locally supplied goods, while receiving a sufficient return on their investment.

A BRIEF HISTORY OF THE DEFENCE INDUSTRY

The development of defence technology and the production of armaments have been part of South Africa’s history for a long time. The foundations were probably laid centuries ago with the revolutionary design of the short stabbing spear by the Zulu King Shaka, followed later by the work of the Cape gunsmiths in the late 18th century and early 19th century. The first artillery pieces designed and produced in South Africa were the two cannons manufactured by a Boer farmer and used in the First Anglo-Boer war. Further cannons were locally manufactured during the Second Anglo-Boer war, the ‘Long Cecil’ being a well known example.

The South African defence industry produced arms and ammunition for the allied forces in both world wars. During the Second World War, 5 770 armoured cars, 600 guns of various calibre and more than 30 000 military vehicles of eighty different types were produced. Large quantities of bombs and ammunition were also manufactured. South Africa was one of the first countries to develop and manufacture radar sets. After the war, the development of armaments was discontinued and virtually the whole wartime production capability was dismantled.

In 1964, the Armaments and Production Board was established with the responsibility for acquisitions and the management of the public sector defence industry. From the outset the policy of the Board was to utilise the private sector industry for the production of armaments whenever possible. Further restructuring took place as local development became necessary, increasingly requiring more technical and business proficiency. This resulted in the establishment of the Armaments Board in 1968, subsequently changed to Armscor in 1977, six months before the imposition of the United Nations’ arms embargo against South Africa.

After the formation of Armscor, the policy of using the private sector industry, when possible, remained. Capabilities that already existed in the private sector, such as in the vehicle and electronics sector, were not to be duplicated. However, Armscor felt it was necessary to establish capabilities in a number of other areas, such as weapons systems development and integration, and munitions production, which led to the establishment of a public sector defence industry. A major milestone during this period was the establishment of product design and development capabilities, which elevated the manufacturing sector of the whole economy to that of an industry with capabilities of design and development. This has led to the defence industry gaining prominence over the last twenty years, with the development of world class technology and products.

In 1992, Armscor was divided into two separate organisations. Denel, a new public sector company, was established as a commercial enterprise reporting to the Minister of Public Enterprises. Denel is a public sector commercial company, trading its products and services for profit in the same way as the private sector, and constitutes a significant part of the local defence industry.

The defence expenditure of the SANDF in the eighties was at about R15 billion per year, reaching a peak of R17 billion in 1990. Since then, it has declined rapidly to approximately R10,6 billion in 1995. As a result of the recent decline in total defence spending, the spending on armaments has also declined considerably, with reduced purchases from the local defence industry. At the same time, employment by the industry has also fallen dramatically from a peak of about 160 000 people to less than 50 000 at present. These reductions have led to a substantial loss of skilled manpower, manufacturing capability and capacity in the manufacturing industry, and the defence industry in particular, with many companies converting capabilities to goods outside the brief of the defence industry.

THE RELATIONSHIP BETWEEN THE NATIONAL DEFENCE BUDGET AND THE DEFENCE INDUSTRY

The defence industry, having been established primarily to serve the needs of the SANDF, is still dependent on these needs which, in turn, are dictated by the national defence budget. The budgetary allocation available to the SANDF has decreased by fifty per cent between 1989 and 1995. While the total expenditure has been reduced, the portion of the budget being spent on armaments, and particularly capital items, has also been reduced. This has led to a drop in equipment purchases from the defence industry from more than R10 billion in 1989 to the present figure of less than R3,5 billion, a dramatic reduction in any terms.

The relationship between the expenditure in the defence industry and the national defence budget for 1995 is shown in the Diagram. The defence budget is spent through three channels - SANDF direct expenditure on salaries and administration, the Defence Account for non-military or civilian types of items, and the Special Defence Account for military specific items called ‘armaments’. Of the 1995 defence budget of R10,5 billion, R4 billion was directly spent on salaries and administration, R3,05 billion through the Defence Account, and R3,5 billion through the Special Defence Account. Most of the Defence Account purchases are made through the State Tender Board, while all the Special Defence Account purchases are done by Armscor, on behalf of the SANDF.

Purchases are either of a capital nature or an operating nature. Thus, of the R3,05 billion spent in the Defence Account in 1995, R334 million were for capital items, such as motor vehicles and furniture, while R2,7 billion were for consumables or maintenance, such as stationery, food or fuel. Most of the Special Defence Account of R2,5 billion was spent on capital items, for major systems such as aircraft, ships and armoured vehicles, while R957 million were spent on consumables, such as ammunition, spares and maintenance of military equipment. Included in the capital allocation of the Special Defence Account was an amount of R329 million for research and development.

Of the total of R3,5 billion spent by Armscor, an estimated R800 million was used for imported equipment, leaving less than R2,7 billion for the local defence industry. Members of the South African Defence Industry Association (SADIA) have supplied about 94 per cent of these local purchases, and hence serve as a good representation of the industry.

THE DEFENCE INDUSTRY TODAY

There are approximately 800 companies supplying defence equipment to Armscor, including a number of overseas suppliers. Of the local suppliers, 53 are members of SADIA, and of these, 43 companies, representing by far the major portion of suppliers to Armscor, have submitted data to establish some statistics on the industry.

A company wishing to supply to the SANDF through Armscor, now has to apply for accreditation by Armscor. To date, over 460 companies have applied for accreditation, and Armscor expects this to increase to about 800 companies by the completion of the programme. During the last year, 682 companies were awarded 4 438 contracts for supplies to Armscor, representing goods and services to the value of almost R3,7 billion.

THE SOUTH AFRICAN DEFENCE INDUSTRY AS A MILITARY ASSET

The SANDF is constituted and charged to perform certain functions in the 1993 Interim Constitution of the Republic of South Africa. This constitutional mandate requires a "... modern, balanced, technologically advanced" national defence force, maintaining a state of preparedness sufficient to perform the functions accorded to it in the Interim Constitution. The South African defence industry was established as a response to the needs of the SANDF for equipment and services in the face of the UN and other arms embargoes. An extensive defence industry has been established over approximately the past fifteen years, which today can be considered as a national military asset.

To meet its obligations, the SANDF must have access to appropriate technologically advanced armaments and related defence equipment. The existence of a sophisticated domestic defence industry is an important factor in enabling the SANDF to maintain the necessary state of preparedness in a cost-effective manner. While not all defence equipment has to be manufactured locally, domestic design, development and manufacture of certain systems and products are essential in enabling the SANDF to execute its constitutional mandate effectively.

In addition, to enable South Africa to follow an independent foreign policy, and make its own decisions, it needs, among other capabilities, a relatively strong and sophisticated defence force. A strong local defence industry deployed in support of the SANDF is a considerable advantage. Defence forces which have to buy their equipment from foreign suppliers have significant disadvantages, while those which are supported by their own local defence industry have significant advantages, which include the following:

Maintenance of equipment and systems can be carried out locally by the supplier. This decreases downtime and improves operational availability with commensurate cost savings. In times of urgent need, the supplier is available to carry out required maintenance and repairs.



Modifications and developments to improve availability and performance can be effected when necessary, creating more cost-savings.



Surprise in battle can be achieved, as capability is unknown to the enemy.



The technological capabilities and systems, e.g. mine protection technology, are not known by a potential enemy, which makes it much more difficult for such a potential enemy to develop countermeasures and tactics.



With a local defence industry, it is possible to keep systems in service much longer than the normal life expectancy of such systems, due to effective maintenance programmes and life extension developments. These have achieved enormous reductions in cost, as many systems would have had to be replaced, if this capability had not been available. Today, the South African defence industry is a world leader in the field of upgrading outdated systems.



Defence forces can never achieve the same in-depth technical knowledge and skills that are available in an experienced industry, due to promotions and service conditions. The average experience of a South African Air Force mechanic, for example, is less than three years, compared to about fifteen years in industry. The technological strength of any defence force lies in its supporting defence industry.



With a properly structured local defence industry, it is strategically easier and more efficient to gear the SANDF to counter a heightened threat. With the intended establishment of the future defence force around a ‘core force’, the availability of a local industry that can respond to increased needs, becomes essential for the concept to work successfully.



The SANDF and Armscor have become sophisticated clients as a result of their exposure to the local industry. Because of their technical and operational expertise and experience acquired through this exposure, they have learned what and how to specify, what can possibly be expected, and how to evaluate offers. This ensures that cost-effective purchases are made.

THE SOUTH AFRICAN DEFENCE INDUSTRY AS A NATIONAL ECONOMIC ASSET

The South African defence industry is a national economic asset. Considerable resources have been utilised in establishing this industry, which has a substantial output when compared to other complex manufacturing industries. It is in the interest of the country for this industry to optimise the use of these assets and maximise the contribution it makes to the country’s economic well-being.

Sales inthe industry

The total sales figures for the industry are not known, but those for SADIA members are available and are shown in Table 1. The figures show that 94 per cent of the local defence purchases of Armscor are supplied by these companies. In the last three years their output increased by 33 per cent from R4,5 billion to over R6 billion, with a significant portion of the growth occurring in the last year.

The defence equipment portion of output has been declining from 76 per cent of total sales in 1992 to sixty per cent in 1995. Defence sales have remained at approximately the same level of about R3,5 billion throughout the period, while civilian sales has almost doubled over the same period as a result of diversification. This confirms the efforts of companies in the industry to diversify their output, by using defence technology and capabilities for civilian production. At the same time, there has been a dramatic increase in non-related business, as companies have realised that they cannot expect their future growth to derive from defence business only. The portion of total sales representing non-related business has doubled from ten per cent of output to more than 21 per cent last year, and totals nearly R1,3 billion.

The size of sales of those companies for which figures are available, vary from over R3 billion for Denel, to a company not expecting any sales in 1995. The distribution of the size is shown in Table 2. Most of the companies have sales of less than R100 million per year, and half of these have sales of less than R10 million per year.

The portion of defence sales varies in each company, but most are in the range of fifty to 75 per cent as shown in Table 3. Only two companies depend entirely on defence sales. In 1995, three companies made no local defence sales at all.

Exports of the industry

Export figures for the defence industry are shown in Table 4. These have increased steadily from fifteen per cent of output in 1992, totalling R684 million, to more than R1,25 billion, or 21 per cent of output in 1995. During the last three years, defence exports have increased as the local requirements have decreased, to the extent that, by 1995, nearly 29 per cent of defence output have been exported.

In 1992, ninety per cent of exports were defence equipment, while civilian exports totalled only five per cent. By 1995, civilian exports had grown to fifteen per cent of the industry’s total exports, while defence exports had dropped to 84 per cent. This illustrates the speed with which the industry is converting the application of its technology and capabilities to civilian products of international standards. It must be borne in mind that the assistance provided by the Government to promote exports does not differ between the defence industry and other Stage 4 Industries, except that some of the assistance is routed via Armscor instead of the Department of Trade and Industry. The general export assistance scheme (GEIS), which has also applied to the defence industry, is now being phased out. Export marketing support for defence equipment is provided by Armscor, for very good and practical reasons, not the least being the necessity for co-operation with the SANDF. However, civilian exports are handled in the same way as any other exports from South Africa, and this industry has been able to increase these exports by five times during the past three years.

Four of the above companies are already exporting more than fifty per cent of their output, while eight of the companies are not exporting any goods at all. Table 5 shows that most companies are still exporting less than 25 per cent of their output.

The portion of defence production which is exported by each company is shown in Table 6. It indicates that, while ten companies do not export any of their defence products, one company exports all of its defence production and four others export in excess of fifty per cent of their output, with two of them exceeding 95 per cent.

Defence equipment trade balance

Table 7 shows the trade balance in defence equipment. In 1992/3 there was a negative trade balance of over R200 million. However, by the 1994/95 financial year, this negative balance had been turned into a positive trade balance of over R335 million. This positive trend is expected to continue despite the potential for some large orders being placed overseas for ships and aircraft in the near future. This has developed as the capital expenditure of the defence force decreased and the local industry increased its export markets. The imports shown include components of a military nature which require import permits.

Foreign Exchange Requirements of Defence

The trade balance of defence equipment is of lesser importance in assessing the true value of this industry. What is important, however, is the foreign exchange savings that accrued from South Africa having its own domestic defence industry. This is indicated in Table 8 for the year 1994/95.

If the local defence industry did not exist at all, all armaments requirements of the SANDF would have had to be imported. Table 8 implies the potential impact this would have had on the foreign exchange account. Through local manufacturing of most of the products required by the SANDF, exports, and the creation of the possibility for countertrade credits against imports, the industry has saved the country almost R3,5 billion in foreign exchange during 1995.

Contribution of the Industry to the State

The defence budget has to come from tax revenue. Through the use of statistics provided by a public company in the defence industry, it has been established that, for every one rand of defence sales, eighteen cents are paid to the Government by the company and its employees. This was calculated after any subsidies granted by the Government were deducted. This means that exports in the defence industry in 1995, have enabled the Government to receive an extra R225 million in revenue. In addition, it is calculated from Denel’s financial statements that payments to the State, both directly and indirectly, as a result of the company’s activities, totalled R590 million in 1994/95. Table 9 shows that the defence industry as a whole, has probably enabled the State to collect in excess of R1 billion from it during 1995. As the industry only received about R2,6 billion of the defence budget in 1995, it is already in effect repaying about forty per cent of the Government’s expenditure on local defence equipment.

Industry Employment

The total employment figures for SADIA members included in the survey is 26 120, of which an estimated 17 081 employees are working directly on defence products, as shown in Table 10. However, in nearly all companies a clear division between defence and civilian production is absent, making it difficult to allocate people to either category. It follows that a division in the number of employees working specifically on defence products will remain a mere estimate. As there are many defence contractors to Armscor and subcontractors to the industry - figures that are not included in Table 11 - it is estimated that the total employment figures in the defence industry now stand at 48 600.

Table 10 indicates a reduction in total employment of employees involved in defence related production, due to the country’s reduction in defence expenditure. Meanwhile, employment in non-defence activities is increasing in the industry, unfortunately at a lower rate than the decline in defence work.

The size of the companies in the industry varies from Denel with over 14 000 employees to seven companies with less than twenty employees, as indicated in Table 11. The smallest company had only five employees in 1994. The distribution below shows that most companies are of small or medium size.

The average employment cost in the industry for 1994 was approximately R60 000 per annum, considerably higher than the average for the industrial sectors within which the defence industry operates, and one of the highest in the manufacturing sector as a whole. This is mainly due to the technological level of the industry. A further decline in employment figures would not only have a negative social and economic impact, but would also result in an irreversible loss of high level technical skills available in the industry.

The South African Defence Industry as a National Industrial Asset

The South African defence industry has played a strategic role in the development of the country’s industrial structure, particularly in the manufacturing sector. The future thrust in economic growth in South Africa will have to be the manufacturing sector. It is internationally recognised that countries experiencing sustainable growth and continuously improving their standards of living, have achieved this primarily through growth and development in their manufacturing sectors. In South Africa at present, the manufacturing sector makes the largest contribution to GDP (about 25 per cent). This percentage, moreover, is relatively constant, as the growth in the manufacturing sector positively influences growth rates in the total economy. Likewise, when the manufacturing sector shrinks, the economy also does.

The manufacturing sector provides jobs to 1,46 million people, representing approximately nineteen per cent of the total employment in the country, and a figure approximately equal to the number of employees in the public service. However, public service employment has increased steadily from 1988, with 1,28 million employees, to 1,46 million in 1994. Meanwhile, employment in the manufacturing sector has decreased from 1,59 million in 1988, to 1,46 million in 1994, a loss of 130 000 jobs. Over the same period, it is estimated that about 100 000 jobs were lost in the defence industry. During this period, with increases in government employment and a decrease in manufacturing employment, the economy was in decline, despite the large reduction in defence spending. It is a known fact that it is far easier to destroy jobs than to create them, particularly in the manufacturing sector.

The most technologically intensive industries are the mechanical, electrical and transport equipment industries known as Sector 38 Industries. The defence industry is primarily part of this sectoral structure, and defence expenditure in these industries amounted to R4,1 billion in 1995. In 1992, Sector 38 Industries, including the defence industry, contributed eighteen per cent of manufacturing sector added value. In other developed countries, this sector contributes considerably more. In Germany and Japan, it contributes about forty per cent of added value, while Malaysia and South Korea record a value of about 35 per cent. These values reflect those countries’ industrial strength which, in turn, provides the higher levels of economic stability and growth enjoyed by them.

In the manufacturing sector, the areas of greatest wealth creation and sustainability are where products are design and technology intensive. It is in these sectors where the potential for product differentiation that would result in international competitiveness and exportability, is created. These are mostly Category 4 Industries that produce complex goods, consisting of a variety of materials and components and using different technological means in their production. The nature of products in these industries gives rise to competitiveness that is achieved through the key factors of design and manufacturing technology.

A key aspect of manufacturing technology is the manipulation of materials into components for assembly in products and systems. In successful industrialised countries this is generally done by subcontractors, representing small specialist operations where relevant technology is developed and implemented. The defence industry has established a considerable capability in using subcontractors, and the survey of SADIA members shows that more than thirteen per cent of their suppliers are subcontractors, with more than 1 500 subcontractors being used. Each of these subcontractors has developed technological capability and implemented the necessary quality control systems for defence production. Yet, only five per cent of these subcontractors are exclusively supplying defence products, and nearly all of them has made their technological competencies available to other industries and customers. In this manner, the benefits derived from involvement in the production of defence products are available to civil consumers of products supplied by these companies. An example would be the raising of quality standards and production technology by subcontractors to meet the specifications for supply to the defence industry. These higher standards and capabilities are used for production for other customers in other industries, thereby raising the quality of their products.

More than 500 of the 1 585 subcontractors are small companies with less than twenty employees, with another 662 being of medium size. Small and medium sized businesses form a sector that has been identified by the Government as important to the foundations of growth in the economy. The defence industry subcontracted in excess of R470 million to small and medium sized companies during 1994.

Another measure of the industrial capability of a country is the size of the portion of its exports from Sector 38 Industries. It indicates its ability to design and develop new products and implement competitive manufacturing technology. In 1991, when 12,1 per cent of the output of all manufacturing industries were exported, Sector 38 Industries exported only 9,8 per cent. Defence industry exports in 1995 represented 21 per cent of total sales. In 1993, the exports of Sector 38 products totaled only eight per cent of all merchandise exports from South Africa, a considerably lower figure than those of industrialised nations, which ranged between 71 per cent for Japan, 40-45 per cent for the East Asian tigers, to approximately forty per cent for most European nations.

Exports of R1,25 billion in 1995 make the South African defence industry the second largest exporter of Category 4 complex manufactured products, after the industrial machinery sector, and about the same size as the motor vehicle component sector.

Part of the problem facing the South African industry is the limitation on exports as a result of the country being an industrial colony. Export constraints in Sector 38 Industries apply to 89 per cent of companies (representing about 61 per cent of output), due to foreign shareholding or licence agreements. In addition, 37 per cent of companies (thirty per cent of output), are subject to localisation constraints with regard to local manufacture, design and development, and/or subcontracting. Companies in the defence industry are not subject to these constraints, as the products and technology have mostly been designed and developed locally by South African companies. In its recent report on the competitiveness of South African industry, the Monitor Company has stated that many manufacturers produce goods under licence, a luxury that has not been afforded the defence industry. Their products are unique and the industry has established a significant advantage over other players in the South African economy over the years.

The defence industry is a key industry in the development of South Africa’s manufacturing capability. It has become a thrust industry through its capacity and capability in design, development, manufacturing technology, quality standards and management systems, education, training and development of human resources, extensive subcontracting, and support of the small and micro-industry. The defence industry is vital to the maintaining of a competitive advantage in the manufacturing sector of the economy.

The South African Defence Industry as a National Technological Asset

Defence industries are generally leaders in the development and application of advanced technology, particularly in manufacturing. The space industry is the only industry requiring more advance technology, and South Africa’s efforts in this area have been abandoned. The South African defence industry has developed advanced technological capabilities to meet the requirements of the SANDF, and to enable it to compete effectively in international markets. It is also well placed to multiply the advantages of advanced technology to the benefit of the wider economy, as is already apparent.

Developments in the defence industry has been systematic and organised. It refrained from reinventing the wheel, and evolved progressively from procurement in the early days, to sophisticated acquisition processes, including research, engineering development, industrialisation, manufacture and international marketing. Throughout these stages, a strong commitment to research and development has underpinned the industry’s programmes. However, without a continuous commitment to research and development, South Africa will not be able to maintain a competitive advantage in world class technology. It will lose the ability to export technically complex products and will not be able to retain technological preparedness for future military requirements. The amount spent by the defence industry on research and development (R&D) has already decreased by 67,5 per cent since the beginning of the nineties. In 1989/90, more than R1 billion was invested in R&D, while only R329 million was spent in 1993/94. The decline in real terms amounts to about 84 per cent, and at the present level of expenditure, there is some risk that the technological advantages gained so far will be lost.

South African defence technology is increasingly recognised for its excellence. Partnerships and joint ventures with international industrial concerns are providing valuable transfers of technology and expanded marketing opportunities. Among the companies surveyed by SADIA, twelve reported entering into a total of 93 joint ventures with companies in other countries. Of these, 29 per cent involve technology with a civilian application, 63 per cent with a defence application and seven per cent with an application in both areas. Thus, a total of seventy per cent of joint ventures are focused on defence technology applications. In only 27 per cent of joint ventures, the source of technology is external to South Africa, while the technology source in 46 per cent of cases is inside the country. In 28 per cent of these ventures, technology is expected to flow in both directions. These figures reveal the considerable amount of technological competency that has been established in the defence industries, as more than 74 per cent of joint ventures will involve technology from sources in South Africa.

Most of the joint ventures involve companies in the United Kingdom, representing 26 agreements, followed by France with twelve. There are nine joint ventures with companies in each of the United States, Germany and Malaysia. These undertakings have been established with companies in a total of twenty different countries.

Some of the world-class technologies, applications, systems and products developed and produced by the South African defence industry are shown in Table 12. Many of these constitute areas where significant exports are or can be achieved, as proprietary technologies have been developed that are on the forefront of world capability.

The quality standards for defence equipment have to be of the highest order. The South African defence industry has become synonymous with high quality defence systems and has established an enviable track record in this regard. Quality management has been developed to include comprehensive evaluation and thorough verification of a system from the earliest phases of development through to production and product performance. Due to this requirement and its commitment to quality, the defence industry has led the manufacturing sector in the application of modern quality management systems and their applications. The industry has developed a number of advanced and internationally comparable testing facilities to ensure the achievement of required quality goals. The industry has the capability to assure the quality of local military and commercial products against world standards, thereby effectively facilitating competition of local products on international markets.

With a technically competent local defence industry, it is possible to keep systems in service much longer than their normal life expectancy, due to effective maintenance programmes and life extension developments. These have enabled large reductions in cost, as many systems would have had to be replaced, if this capability was not available. Today, the South African defence industry is a world leader in the field of upgrading outdated systems, so much so, that it has led to significant exports in many cases. An example is the Eland armoured car, which was originally designed and developed by Panhard in France in 1962. It was marketed as the Panhard AML61, and imported by South Africa as the Eland Mark 1. After a series of upgrades and redevelopment, this vehicle has emerged as the Eland Mark 7 DT, using a locally manufactured ADE diesel engine. The developments have incorporated local innovation and ingenuity to produce a superior product, more suitable for African conditions and at the end of its apparent life cycle, turning it successfully into an export product.

While it is often difficult to convert military technology directly into civilian products, the process involved in technology development creates a ripple effect through a wide variety of industries. Many governments, notably the United States, France, Germany, United Kingdom, Italy and Sweden, realise the value of an established defence industry and support its growth, and especially research and development. This creates a wealth of knowledge and technology which can be applied both to military equipment and civilian products.

Most of the companies in the defence industry have been diversifying their technological capabilities to civilian production. This ranges from process to complete systems, and includes components and subsystems. While there are many products and technology that have already been converted to commercial applications, not all defence production can be converted to meet civilian needs. However, some examples of the commercial application of defence industry technology are shown in Table 13.

The Defence Industry in the Future

The defence industry has grown to meet the needs of the SANDF. In the last five years or so, it contracted as the SANDF budget was reduced. However, the SANDF still needs the services of an efficient defence industry, that would permit it to:

develop strategic technology and make cost-effective purchases of certain products and systems;



ensure life-cycle maintenance and support of such systems;



perform refurbishment and upgrades where necessary; and



support and implement the concept of a ‘core force’.

While the Special Defence Account has been reduced by 65 per cent in real terms during the last five years, defence spending is expected to remain approximately constant in real terms over the next five years. As a result, companies in the defence industry are directing their efforts increasingly to civilian markets through the diversification of market and product developments. They also predict a strong growth in non-related business, having recognised the need to develop alternative business because of the expected lack of growth in the demand for defence equipment. The projections of the industry for 1996 and 2000 are shown in Table 14. These show a total output forecast by the industry of over R10,9 billion in 2000, of which only R5,1 billion will accrue from defence business. Due to the predicted flat local market, defence sales are expected to continue to decline as a portion of total sales, from sixty per cent in 1995 to 47 per cent in 2000, while civilian and non-related sales are both expected to increase to 24 and 28 per cent respectively. Thus by 2000, more than half of the output of this industry will not be defence equipment.

The industry is predicting considerable growth in exports of all three categories. Total exports of R3,9 billion in 2000, up from exports of R1,25 billion last year, are forecasted, as shown in Table 15. The largest growth in value is in the defence area, where by the year 2000, the industry expects to be exporting more than half of its defence output. It is also expecting its diversification efforts to be beneficial in the export markets, as it predicts to increase the 1995 civilian exports of R187 million to nearly R700 million by the year 2000. Non-related exports are expected to grow from R18 million to over R330 million.

Expectations of figures for defence exports figures are high despite an increasingly competitive international market. The US Department of Defense forecasts global defence trade in the decade 1991 to 2000 to be between US$291 and US$329 billion, decreasing by about fifty per cent from the previous decade. The South African defence industry believes it has significantly different and desirable technology which, coupled with good service and support, will make this export growth possible.

The defence industry, however, is driven primarily by the needs of the SANDF. Any effective strategic planning by this industry will require the Defence Force’s commitment to long range planning for capital purchases and timely, open communication between itself and the industry as to the SANDF’s requirements.

Present sales performances by this industry are based on the previous high investment in R&D, and do not yet reflect the considerable decline in R&D investment of recent years. Although better engineering skills may compensate for this lower level of investment in the short term, increased investment in R&D by both the SANDF and the industry will be necessary to prevent a sharp erosion of competitive advantage and core skills necessary to meet the SANDF’s needs for force multiplier technology. Many of these will be lost by 2000 unless immediate action is taken to maintain the level of investment in R&D. Failing to do so could jeopardise any notion of a ‘core force’. At present, total R&D investment in South Africa is decreasing, just when it should be increasing. While the country is starting to reap the rewards of R&D investments in defence technology of previous years, there is no sign that funds which have been taken away from the defence budget are reallocated to R&D in other areas of the manufacturing sector or the economy as a whole.

Export sales of both defence and civilian products are essential, if this industry is to remain a cost-effective supplier of relevant, advanced defence technology to the SANDF. However, the industry recognises that all defence exports will necessarily be subject to an appropriate and responsible arms export control regime. The defence industry recognises that Government will have to weigh human rights considerations against potential commercial benefits deriving from weapons sales. The defence industry also accepts that arms sales policy involves consideration of political/diplomatic, military/security, economic/commercial and ethical considerations. However, Government must allow the industry to operate effectively and responsibly, by way of an arms export control regime which:

is efficient and rapid in delivering decisions;

transparent with respect to criteria and decisions;

predictable and consistent; and thus

sustainable in terms of domestic and foreign policy.

It is important that the industry has a clear understanding of the ‘rules of the game’, and that the Government applies them consistently and predictably. Exporters and prospective exporters must have a reasonable opportunity to state their case to the regulators before decisions are made. The industry will assume its responsibilities in this regard and create the means to advance its interests effectively and with responsibility.

Once this is established, the industry will not require assistance in its own transformation. It has already shown that it can diversify and expand into non-military areas. If the industry does not grow from its present situation, it will probably not survive in the long term. Thus to retain the minimum capability and capacity to meet the SANDF’s needs in the future, the South African Government, like those of its competitors, must actively support its own defence industry and particularly its exporters.

Where the SANDF’s requirements cannot be met cost-effectively by the domestic industry, procurement from foreign sources should be subject to a well-considered offset/countertrade policy, geared to securing countervailing benefits for the South African industry and ensuring cost-effective maximisation of local added value.

A large investment has already been made by all South Africans in the defence industry. It must be ensured that the country gets the maximum benefit from this investment. With the right opportunities, a commitment from the Government and a sensible progressive environment, the industry itself will provide this benefit through its continued dynamic growth, based on product development, exports and diversification.

Edited version of a paper presented at the conference on The South African Defence Industry in the Future, jointly presented by the Institute for Democracy in South Africa (IDASA), the South African Defence Industry Association (SADIA) and Armscor, Midrand, 27-28 March 1996. The papers presented at this conference will be published by IDASA in the future.