Military Matters

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It was a tale of arms and the man for South Africa’s troubled weapons company Denel last week, as the firm’s new CEO announced sweeping rescue plans.

These include the sale of seven non-core businesses in an effort to turn what the public enterprises director-general has described as a “dead duck” company into a viable business.

Denel is expected to post losses of up to R1.6bn ($240.24m) this year. Some blame this on the stronger rand hitting export sales, while the minister for public enterprises, Alec Irwin, has complained that the government needs to tackle under-capitalisation at the firm.

Irwin appointed Shaun Liebenberg to be the new CEO of the firm back in April.

He inherited a company thought by analysts to suffer from a lack of a clear business strategy. Denel is not only proving to be uncompetitive abroad, but is suffering from a declining domestic market share too.

To make matters worse, Denel has had suspended a vital R24m ($3.6m) contract to sell India 400 anti-material rifles – large-calibre sniping weapons – while a full investigation is carried out into allegations of bribery. The case could have serious consequences for several other contracts with the Indian military, now fast developing into one of the world’s largest arms buyers.

However, political support for Denel remains strong, and it is clear that while there has been some criticism from the opposition Democratic Alliance over the spending of taxpayers’ money to keep the company afloat, there is general political consensus that the firm needs to be saved.

Portia Molefe, the public enterprises director-general, was quoted in Business Day last week as saying that the company would be “a dud anywhere in the world”, but then went on to say that it was a strategic imperative for South Africa to rescue the firm.

Along with highlighting its military and strategic importance, Molefe said that Denel was an incubator for innovation and that many countries were using military companies to develop technology for civilian applications.

It appears at this point that Liebenberg, who came to Denel from the private South African defence company Grintek, is to be given a carte blanche to begin a painful restructuring process, which could see significant job losses.

“About 7000 jobs could be on the line at the company because the arms manufacturer is no longer viable,” Liebenberg told a parliamentary select committee last month.

He went on to explain that Denel should be aiming to employ around 3000 workers as opposed to the current 10,000 employed by the company.

Liebenberg has identified key failures in Denel’s overall business model. Most analysts would agree that South Africa’s defence budget is only a fraction of what would be required to maintain Denel’s many wide-ranging activities, which span from producing small-calibre ammunition to building complete military platforms like the Rooivalk attack helicopter.

Liebenberg has, therefore, called for a renewed focus on niche technologies and for Denel to become a local prime systems integrator and a supplier of sub-systems and components to the local market, in co-operation with other local companies.

He also believes that Denel has remained isolated as an independent prime contractor in an era when partnerships are the key to winning international contracts. A recent contract worth R3.2bn ($480.48m) for Denel and Aerosud to build wing tips, ribs and spars for the Airbus A400M military transport plane could signal the way ahead. However, some sources say that the purchase of eight of the aircraft could cost the South African taxpayer as much as R8bn ($1.2bn). But it is also argued that this could leave the door ajar for future partnerships with Airbus.

South Africa is the only non-European construction partner in the project, whose participants include the defence industries of the UK, France, Spain, Germany, Belgium and Luxembourg.

Under the proposed structural changes, Denel will remain 100% state-owned, but will become an investment holding company with investments in subsidiaries and associated companies. Liebenberg has called for the creation of “technology clusters”. These cover five primary areas: infantry and artillery systems, munitions, aerospace (missiles and unmanned air vehicles), optronics, and aviation.

Some analysts believe that this gives the government increased flexibility by allowing it to decide whether it wants to hold minority or controlling interests in these components.

The vision may be crystal clear, but the implementation of these reforms may hit stormy waters when it comes down to negotiating the redundancies of 7000 employees. The government’s ability to manoeuvre on this will likely depend on the overall performance of the economy in the next few years.

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