Agreements with international aerospace and defence manufacturers result in a rising number of joint ventures and investment opportunities in Saudi Arabia

 

Agreements made with international manufacturers of military hardware could result in thousands of skilled jobs for Saudi citizens and substantial investment in the Kingdom. The deals comprise the first steps of a plan to create a domestic defence industry capable of supplying more than half of its annual demand for advanced weapons systems, aircraft, ships, tanks and communications systems.

With an impending deadline of 2030, the current state of military manufacturing in the Kingdom makes the task more challenging, as just 2% of military procurement needs are met by local Saudi businesses. Two companies, both of which are wholly owned by the state, will be instrumental in forging links with international companies and fostering the growth of advanced manufacturing. The first is the Saudi Technology Development and Investment Company (TAQNIA), which was formed in 2011 with a mission to localise technology in Saudi Arabia and to commercialise the outputs of research development centres such as the King Abdulaziz City for Science and Technology (KACST). TAQNIA has subsidiary companies and divisions focused on aeronautics, space, defence and communications.

The second, Saudi Arabian Military Industries (SAMI), was created in 2017 as a holding company with four main units: aeronautics, land systems, weapons and missiles, and defence electronics. When SAMI was first launched, the authorities announced it aimed to contribute more than SR14bn ($3.7bn) to the Saudi economy and create 40,000 jobs by 2030. In 2018 it signed two agreements that have the potential to create 2000 direct jobs for Saudis between them, as well as an additional 10,000 indirect jobs in the Kingdom.

Spanish Ships

A significant proportion of defence expenditure between 2013 and 2017 has been used to modernise and bolster the Royal Saudi Naval Forces. In 2014 it signed a deal to buy 33 patrol boats from Germany at a cost of €10m to €25m per unit. It also purchased three large patrol boats from France in 2015 for €250m, and four advanced frigates from the US in 2017 for $6.5bn. The combined cost of these projects was SR28bn ($7.5bn).

In April 2018 a new deal was signed for the purchase of five corvettes from Spain for $2.2bn (SR8.2bn). However, this agreement was substantially different from the others, as it was intended to mark SAMI’s first steps towards the increased localisation of naval procurement.

In 2018 a joint venture was created between SAMI and shipbuilding company Navantia that would outfit the fourth and fifth AVANTE 2200 vessels after they are delivered. The programme will run from 2018 to 2022. The joint venture SAMI Navantia Naval Industries is responsible for combat system integration and installation; system engineering; system architecture; software development; hardware design and testing; verification; prototyping; simulation; and through-life support. It was announced that the contract would generate 6000 direct and indirect jobs, including 1100 direct jobs, 1800 in auxiliary industry and more than 3000 in the supply chain.

Boeing Agreement

In March 2018 Crown Prince Mohammed bin Salman toured Boeing’s Seattle manufacturing facility. During that visit, Boeing and SAMI signed an agreement to establish a joint venture to perform maintenance repair and overhaul (MRO) tasks on both fixed-wing and rotary military Boeing aircraft. Saudi Arabia bought 72 Boeing F-15S fighters in the 1990s, and from 2016 began replacing them with 154 F-15SA jets, which are an advanced version of the original aircraft. This development follows another substantial Boeing purchase. In 2017 Saudi Arabia signed a $3.2bn contract for 244 of Boeing’s AH64E Apache attack helicopters and in 2018 Boeing was awarded a $24.7m contract to supply Royal Saudi Land Forces with new Chinook helicopters. It was announced that the new joint venture would be the sole provider of sustainment services across Boeing’s military aviation platforms in Saudi Arabia. It was also announced that the new company would increase the localisation of MRO of military aircraft in the Kingdom as well as transferring the technology to install weaponry on the aircraft and helping to localise the supply chain for spare parts. The Boeing joint venture agreement is expected to create 6000 jobs and training opportunities in the Kingdom, creating revenues of $22bn by 2030. “The memorandum of agreement will enable SAMI and Boeing to play a key role in leading and laying the foundational framework for Saudi’s defence sector industrialisation, in line with the goals of the Kingdom’s National Transformation Programme and Vision 2030,” Andreas Schwer, CEO of SAMI, told OBG. “In addition to local sustainment capabilities, the inevitable partnership between the two companies could explore the creation of intellectual property as well,” he said. Schwer joined SAMI from German Company Rheinmetall Group, where he created a number of joint ventures in key export markets including the Middle East.

Rheinmetall

In November 2018 media reported that SAMI had made a $1bn bid for a 49% stake in one of Rheinmetall Group’s joint ventures in South Africa. Rheinmetall Waffe Munition owns 51% of the equity in Rheinmetall Denel Munition, which makes a range of ammunition including artillery shells, with the remaining stake held by the South African stateowned firm Denel. Neither company commented on the report, but the acquisition would give SAMI control of an important source of munitions as well as an opportunity to share manufacturing capability.

Black Hawk

In May 2017 – the same month that SAMI was formed – the US defence giant Lockheed Martin was commissioned to provide Saudi Arabia with $28bn of integrated air and missile defence systems, fixed-wing and rotary aircraft.

In a company announcement, Marillyn Hewson, CEO of Lockheed Martin, stated: “We are especially proud of how our broad portfolio of advanced global security products and technologies will enhance national security in Saudi Arabia, strengthen the cause of peace in the region, and provide the foundation for job creation and economic prosperity in the US and in the Kingdom. These agreements will directly contribute to Vision 2030 by opening the door for thousands of highly skilled jobs in new economic sectors.” The agreement includes a letter of intent, signed by Lockheed Martin and TAQNIA, to form a joint venture supporting the final assembly and completion of 150 S-70 Black Hawk helicopters. The joint venture is anticipated to create 450 jobs in Saudi Arabia and another 450 in the US. It may also help support thousands of jobs in Saudi Arabia as the helicopters are maintained and modernised.

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The Report: Saudi Arabia 2019

Security, Defence & Aerospace chapter from The Report: Saudi Arabia 2019

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