Aerospace and defence sector diversifying Abu Dhabi's economy

 

The security, aerospace and defence sectors have risen to become an important component of Abu Dhabi’s economic diversification strategy, with activities gaining momentum in recent years. In the aerospace segment, 2016 saw major contracts for new original equipment manufacturing (OEM) and maintenance, repair and overhaul (MRO) projects signed, which should support the emirate’s ongoing transformation into a knowledge-based economy. Aerospace development dovetailed with growth in the UAE’s burgeoning space programme, which will see it launch a probe to Mars in 2020, setting the stage for commercialisation and additional private investment on the back of a newly unveiled Space Policy. Development of a robust defence manufacturing base is also progressing well, following the launch of new armoured vehicle and protective equipment ventures.

State Security

Within the emirate, law enforcement is undertaken by the General Directorate of Abu Dhabi Police. Domestic security in the UAE is handled by the Ministry of Interior, which is in charge of seven directorates focused on civil defence, citizenship, residence, ports, traffic, crime and policing. In December 2012 the federal government moved to tackle the rising incidence of cybercrime with the establishment of the National Electronic Security Authority, which has played an increasingly important role in addressing national security concerns, including protection of critical infrastructure (see ICT chapter).

The UAE Armed Forces General Headquarters (GHQ) oversees the country’s land, air and naval forces. Its numbers have swelled since 2014 when the federal government introduced compulsory military service for male Emiratis, and the military has participated in a number of recent regional campaigns.

Defence Spending

As such, the UAE’s aerospace, security and defence industries are poised for significant mid-term growth, offering opportunities to private partners. In June 2016 international defence and aerospace consultant IHS Jane’s published its annual “Global Defence Trade Report”, which found that the combined value of defence spending by Saudi Arabia and the UAE surpassed the total cost of military equipment purchased by Western European countries, after the global defence trade hit a record $65bn in 2015, a $6.6bn increase over 2014. Global defence spending was forecast at $69bn in 2016.

According to IHS, the value of defence equipment deliveries to the Middle East reached $21.6bn in 2015, making it the world’s largest importing region for the goods. The largest regional importers are Saudi Arabia and the UAE, which imported a combined $11.4bn of defence systems – or 17.5% of the global total – in 2015. The UAE’s share of imports stood at $2.07bn and were forecast to have hit $3.06bn in 2016. The US, Canada, France and the UK are the four largest exporters of defence equipment to the Middle East. Commercial development of Abu Dhabi’s aerospace, defence and security industries has become a priority for the government under the Abu Dhabi Economic Vision 2030 long-term development plan.

The three largest players in the UAE’s defence industry are Mubadala Investment Company; Tawazun; and Emirates Defence Industries Company (EDIC). Over the past decade these entities have formed partnerships with a number of international players including Boeing, Airbus, Rolls-Royce, the National Aeronautics and Space Administration (NASA), Lockheed Martin, BAE Systems, Northrop Grumman and Piaggio Aerospace, among others.

The restructuring of Mubadala following a merger in January 2017 saw the creation of a new Aerospace, ICT and Renewables division, which oversees a number of its assets in this space.

Tawazun

Tawazun Holding was established in 1992 as the UAE Offset Programme Bureau, and rebranded under the Tawazun name in 2012. It is responsible for developing new ventures via industrial partnerships and strategic investments through Tawazun Economic Council (TEC), which in turn operates the Tawazun Economic Programme for the aerospace, defence, autonomous systems and cybersecurity industries. Under this offset programme, TEC awards foreign aerospace and defence investors with credits based on the total investment they make in local industries. Companies with an investment value of less than $10m are exempt from obligations. TEC has also created two sector-specific councils: the National Defence Contractors Council and the National Defence Companies Council, with the Tawazun Economic Committee liaising between GHQ and TEC. In November 2016 the 37-member contractors’ council met and announced that it planned to facilitate new joint projects developed by national defence contractors, with the assistance of international partners, in a bid to expand the UAE’s defence manufacturing sector. Tawazun previously held several defence companies in its portfolio, many of which are located in Tawazun Industrial Park (TIP) to the east of Abu Dhabi City, although these have been since acquired by the government-owned EDIC, which was created in 2014.

Edic

Majority-owned by Mubadala and branded as the region’s premier integrated national defence services and manufacturing platform, EDIC is the largest company operating in Abu Dhabi’s defence industry, overseeing a broad portfolio of subsidiaries active in flight training, munitions, drone and military vehicle manufacturing, and digital security technology.

In April 2014 Mubadala, Emirates Advanced Investments Group and Tawazun signed a memorandum of understanding to create EDIC, with the new company set to absorb 11 of their respective businesses in an effort to cut costs, boost bargaining power and streamline operations. EDIC was formally created in December of the same year, going on to absorb five additional companies over the next two years.

Mubadala holds a 60% stake in EDIC. The latter’s subsidiaries include Abu Dhabi Autonomous Systems Investments (ADASI), the Advanced Military Maintenance, Repair and Overhaul Centre (AMMROC), Horizon International Flight Academy, NIMR Automotive, Tawazun Dynamics, Tawazun Precision Industries (TPI) and Barij Munitions, which was formed in 2017 from the merger of Caracal Light Ammunition and Burkan Munitions Systems. The company is expected to be fully integrated by the end of 2017.

Economic Impact

As of February 2015, EDIC companies held Dh3.2bn ($871.2m) worth of assets and employed more than 4800 people, with the workforce expected to rise to 10,000 once the company is fully integrated. Many of the company’s subsidiaries have played a critical role in defence industry development, providing new training and employment opportunities, and bolstering efforts to diversify the economy away from its reliance on hydrocarbons.

Tawazun Holding, meanwhile, launched more than 40 joint venture defence, munitions, aerospace, automotive and metals-oriented companies between 2007 and 2015. Most operate from TIP, which is itself in the midst of a Dh300m ($81.7m) expansion programme that includes the development of infrastructure aimed at accommodating more defence companies in the future. At present, 13 defence manufacturers operate out of the industrial zone that in total comprises 20m sq metres. Tawazun Holding has continued expansion efforts of its own, announcing in March 2016 two new firms: Advanced Pyrotechnics and Al Hosn Armoured Systems. The former specialises in design and manufacturing of non-lethal military ammunition and the latter manufactures bulletproof vests and other protective equipment.

New Deals

In 2012 the UAE adopted a joint approach for defence procurement, MRO and logistics support activities led by GHQ rather than individual air force, navy and army actors. Under this approach, the procurement process tends to favour companies with a strong track record of joint venture activities that support the emirate’s goal of building up local talent, knowledge and production. The joint venture approach offers quantifiable benefits to private contractors, as evidenced by the slew of deals witnessed at the biennial International Defence Exhibition and Conference (IDEX), which Abu Dhabi hosted in February 2017. The event saw 82 deals penned with the UAE Armed Forces over the course of five days, worth a total of Dh19.2bn ($5.2bn), many of which included successful Abu Dhabi-based manufacturers. Chief amongst these was NIMR Automotive, an EDIC subsidiary and leading manufacturer of light and medium-weight wheeled military vehicles in the MENA region. NIMR signed a Dh2.42bn ($658.9m) deal to provide 400, 8x8 armoured vehicles to the UAE armed forces, as well as a Dh23m ($63m) deal for the purchase of its 4x4 tanks. Another local company, International Golden Group, also saw success at IDEX with Dh11m ($3m) in sales in munitions, Dh290m ($79m) worth of technical gear and weaponry, and a Dh46.9m ($12.8m) contract to develop infrastructure for IT projects. Additional deals with local companies included a Dh1.8bn ($490m) contract with Maximus Air to buy air cargo planes and a Dh553m ($150.6m) deal with Trust International Group to purchase military-grade explosive interactive weapons. On the international front, US-based Raytheon was one of the most successful, closing a multi-million-dollar deal with the UAE Navy for Rolling Airframe Missiles Block 2 – used to protect Baynunah-class corvettes – alongside a Dh828m ($225.4m) contract to supply spare air defence parts and a Dh1.3bn ($353.9m) ammunition contract with the UAE Air Force.

Aerospace

Mubadala is the largest operator in the aerospace industry in Abu Dhabi. In addition to holding a 60% share in EDIC – which in turn owns AMMROC and TPI – the company also owns aerospace subsidiaries including OEM-focused businesses Strata Manufacturing and Piaggio Aerospace; MRO providers Turbine Services and Solutions, and SR Technics; as well as Sanad, its equipment-leasing and financing company. Its manufacturing portfolio is rounded out by regional maritime construction and repair company Abu Dhabi Ship Building (ADSB). Mubadala’s growth strategy in these sectors focuses on aviation, aerospace and developing manufacturing capabilities, including investment in new OEM ventures. Its acquisitions have been successful in defence procurement processes. In March 2016, for example, GHQ announced that it had signed a deal with ADASI for the purchase of eight P.1HH HammerHead multi-purpose unmanned aerial vehicles, to be supplied by Mubadala subsidiary Piaggio Aerospace. Each vehicle will be equipped with electro-optical infrared cameras, radar and advanced communications systems. The Dh1.33bn ($362.1m) contract includes integrated logistics support and training.

Aerospace Support

A central part of Mubadala’s strategic growth plan focuses on aviation development, more specifically expansion of OEM and MRO activities and businesses in the Nibras Al Ain Aerospace Park. The emirate’s aerospace development is concentrated at the park, a 25-sq-km development comprising industrial projects, office facilities, mixed-use residential zones and a 5-sq-km dedicated aerospace industry cluster. Mubadala reported that the first phase, 2.5 sq km of tenant plots, was 75% complete in October 2015, with 60% of plots already leased. The second phase is expected to further expand the park’s tenant footprint as a rising number of private and satellite tenants launch activities in the emirate. The park’s development strategy aims to leverage Mubadala’s existing assets while attracting new international aerospace organisations and key industry leaders as tenants.

The area has already witnessed the arrival of new tenants focused on MRO for a diverse carrier portfolio and OEM for some of the world’s largest aviation manufacturers, as well as two flight schools. In OEM, Strata Manufacturing is one of the park’s anchor tenants, focusing on work packages for companies including Boeing and Airbus, and expanding its portfolio of composite manufacturing activities significantly since its launch in 2008. The company is currently in the process of expanding its capacity at the aerospace park with a new facility, called Strata 2.0, to be completed by 2020.

Mro

MRO activities are also poised for significant growth, particularly given fleet expansion plans under way at both Etihad Airways (the flag carrier of the UAE) and Dubai’s Emirates Airlines. Etihad will see its fleet expand from 123 aircraft in 2016 to 179 by 2025. MRO-oriented tenants at the Nibras Al Ain Aerospace Park include Turbine Services and Solutions, SR Technics and AMMROC, which was established in 2010. EDIC, Lockheed Martin and Sikorsky Aerospace jointly own AMMROC, which is set to become one of the world’s largest providers of military MRO services in the near term. The company maintains a strong relationship with GHQ, after partnering with the UAE Armed Forces in November 2013 under a five-year, performance-based logistics contract to ensure the operational readiness of GHQ’s fixed- and rotary-wing aircraft. This is a significant contract due to the wide variety of equipment in the UAE’s fleet, which spans 32 different platforms, including Lockheed Martin’s most advanced F-16 Block 60 fighter jets and French firm Dassault’s Mirage 2000-9 fighter jets.

Mro Growth

As in the OEM segment, aerospace MRO activities continued to expand in Abu Dhabi in 2016. In July, for example, Rolls-Royce and Mubadala confirmed that they would partner to launch a purpose-built MRO facility which will carry out work on the Trent XWB engine, used to power the Airbus A350 XB, as well as a new manufacturing facility which will produce aero engine components, joining a growing portfolio of composite aerostructure manufacturing activities on offer at Strata. The maintenance centre will have annual service capacity for 150 engines, and will begin operations in 2021, while the manufacturing facility is expected to come on-line before 2018.

Turbine Services and Solutions supports customers in the UAE and beyond. It comprises two business units: Turbine Services and Solutions Industrial, and Turbine Services and Solutions Aerospace, each with distinct core competencies and specialities. “We have big plans for growth in the region, and aspirations to service more and more engines in Abu Dhabi, particularly as we expand our aerospace operations to the Nibras Al Ain Aerospace Park in the coming years,” the company’s CEO, Abdul Khaliq Saeed, told OBG.

Sanad Aero Solutions offers spare engine and component support to the commercial aviation industry, leveraging partnerships within its MRO network and with original equipment manufacturers to deliver its financial services. In August 2016 the company announced an expansion of its existing relationship with Etihad with a 12-year sale and lease-back agreement valued at $265m. “One of the reasons for Sanad’s existence is that while an airline – in procuring direct and keeping their own stocks – can get discounts and spares and long-term support from OEMs, this inventory management is not their core competency. Their core competency is putting people in seats,” Troy Lambeth, Sanad’s CEO, told OBG.

The expansion of the Nibras Al Ain Aerospace Park, too, is ongoing, and in June 2016 authorities floated a new construction tender for the fast-track design and build of a primary substation with medium-voltage power cable supply, as well as the station’s installation. This followed the April 2016 award of a $1.7m landscaping contract to Bloomscape.

Shipbuilding

The emirate’s shipbuilding industry has also received a boost, with Mubadala’s ADSB announcing its order book backlog for naval shipbuilding contracts had reached Dh1.56bn ($424.7m) in August 2016. In total, the firm has so far built 268 ships, delivering them to clients around the region and to customers in the Indian subcontinent. Of those ships, most have gone to the UAE’s navy and coastguard. ADSB has ongoing projects for the UAE’s navy and Critical Infrastructure and Coastal Protection Authority (CICPA), as well as Kuwait’s Ministry of Defence. ADSB’s activities include design, construction, repairing, refitting and conversion of naval and commercial ships in steel, aluminium and composite materials. It also undertakes the repairing and upgrading of ship systems and components, and provides associated logistics and fabrication services. “Ultimately we see an increasing role for services in our revenue stream, both for commercial and naval ships,” Khaled Al Mazrouei, CEO of ADSB, told OBG. “While it currently represents 25% of our portfolio, we envision this expanding to 40-50% in the medium term.” Emiratisation is high on the agenda for ADSB. The company has hired 44 Emirati nationals who are currently enrolled in its technician development programme, and plans to employ more. ADSB is also working actively with schools and universities, and according to Al Mazrouei, there has been a great deal of interest among nationals in electrical and mechanical technician jobs.

In January 2016 the firm won a Dh254m ($69.2m) contract on offer from the Kuwaiti government to build eight new vessels, and the landing craft and high-speed protection vessels will be delivered in early 2018, according to a company statement. In the same month, ADSB signed an agreement with the Middle East’s biggest shipyard, Dubai’s Drydocks World, in order to support maritime projects in the UAE and the wider GCC. An Dh850m ($231.4m) joint venture partnership with the Netherlands’ Damen Shipyard has also seen the company supply two 67-metre offshore patrol vessels to the UAE CICPA.

In January 2017 ADSB held a ceremony to inaugurate the company’s floating dry dock in Zayed Port. The dock began servicing vessels in July 2016, and has allowed the company to service larger ships and find new customers. “In our restructuring as a company, we realised that our existing facilities in Mussafah, while perfect for building, are not competitive for services, so we commissioned a floating dock to address size constraints,” Al Mazrouei told OBG. “Our next step is to implement through live capability management, which would be a first for a UAE company, essentially preventative maintenance on a large scale using platform specialities and partnering with multiple companies.”

Baynunah

ADSB’s Dh3.9bn ($1.1bn) Baynunah programme has also delivered six 72-metre corvette-class Baynunah vessels ordered by the UAE Navy. The sixth and most recent vessel, Al Hili, was commissioned in early 2017 by Sheikh Mohammed bin Rashid Al Maktoum, vice-president and prime minister of the UAE, and ruler of Dubai.

Designed in conjunction with CMN of France, the vessels have a manufactured steel hull and aluminium alloy superstructure. A quad MTU engine installation and triple Rolls-Royce waterjet configuration enable maximum speeds of 30 knots. The vessels are outfitted with three types of missiles and two types of guns. They are also capable of handling a five-tonne naval helicopter, with design schemes enabling each to be fitted with a hangar and HELO deck.

Human Resources

Although development of an export-oriented aerospace industry, robust domestic defence manufacturing capabilities, and an expansive network of support services and infrastructure is well under way, the UAE’s aerospace, defence and security industries face a human resource shortfall that is expected to widen in the coming years. Boeing, for example, reported in December 2016 that airlines in the Middle East are forecast to require an additional 200,000 personnel over the next two decades, in the wake of rising passenger volumes and growing demand for new aircraft. However, the global economic slowdown has brought short-term challenges, and Etihad announced a hiring freeze in late 2016.

Training

Aerospace and defence training activities are poised for significant growth with the support of two flagship educational institutions in the Nibras Al Ain Aerospace Park – Horizon International Flight Academy and Etihad Flight College – as well as new training programmes launched under industry-academic partnerships. Horizon offers training programmes that follow European Aviation Safety Agency guidelines, available for both fixed-wing and rotary-wing aircraft. Programmes further benefit from UAE General Civil Aviation Authority endorsement. Horizon offers training courses for individuals and institutions, ranging from flight crew licensing to private pilot and airline transport pilot licensure, as well as flight instructor ratings.

Horizon’s client base includes Etihad Airways, as well as companies in the defence sector and the police force. The academy has accumulated over 70,000 flying hours with more than 500 pilot and instructor graduates. The school’s training portfolio continued to expand in March 2016 when it signed a memorandum of understanding with Airbus Helicopters to become an approved training centre for the firm.

Skills Development

Industry-oriented aerospace and aviation training is also provided at Etihad Flight College, which is wholly owned by the airline, and provides fixed-wing training for 120 Emirati and international cadets annually. The college has also ramped up its training efforts in recent years, announcing in June 2015 that it had signed a $30m purchase agreement for four Embraer Phenom 100E aircraft, which will bring its trainer fleet up to 20 aircraft. Elsewhere, Strata Manufacturing reports over 300 Emirati graduates from its Aerostructures Training Programme since its establishment in 2010, with boosting employment for Emiratis in technical fields a key goal. The Nibras Al Ain Aerospace Park is expected to create more than 10,000 aerospace jobs by 2030. Meanwhile, long-time Emirati defence partner Lockheed Martin has offered both cybersecurity and space fundamentals training programmes to UAE students in recent years.

In December 2013 GHQ also launched its National Defence College, which provides training to prepare military and civil leaders to manage national, regional and international security issues, including future heads of state, security and police forces, diplomats and consular staff, and senior public officials involved in crisis management.

Outlook

With defence spending on the rise and foreign firms flocking to capitalise on promising growth opportunities, the UAE’s aerospace, defence and security sectors should see their contribution to economic diversification continue to rise in 2017.

Aerospace stakeholders will benefit from a government strategy to build up local manufacturing capabilities, a highly skilled workforce, and a far-reaching space programme with great potential for commercialisation. Defence contractors should continue to benefit from government efforts to push knowledge transfer and joint venture activity in the sector.

Maintaining the UAE’s reputation as a secure, stable, business-friendly investment destination remains a critical priority for the government, particularly given recent global economic and political uncertainty. As such, the near- and mid-term outlook for the aerospace, defence and security sectors is positive.

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The Report: Abu Dhabi 2017

Security, Aerospace & Defence chapter from The Report: Abu Dhabi 2017

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