With strong support from the government, the industry has seen notable growth and a host of new investments

Driven in large part by targeted government investment, an offset programme aimed at bolstering domestic capacity and regional unrest that has led to greater defence spending, Abu Dhabi has witnessed tremendous growth in its aerospace and defence industry of late. In the aerospace sector, the emirate has already established itself as a leading global provider of maintenance, repair and overhaul (MRO) services, while partnerships with leading international aviation firms will see an uptick in original equipment manufacturing (OEM) activities.

In addition, the 2014 decision to combine sector players into the Emirates Defence Industries Company (EDIC) – an integrated defence services provider and manufacturer – underpins the emirate’s move towards becoming a regional defence leader. With a formal transfer of ownership occurring progressively from January 2015, Homaid Al Shemmari, the board chairman of EDIC, told OBG, “The outcome from this process will be an integrated defence platform, benefitting from improved alignment, performance and increased capacity, which is better positioned to service the UAE Armed Forces and compete for business in the region” (see analysis).

Sector Specs

Abu Dhabi’s aerospace and defence industries are overseen by several governing bodies. In the defence segment, the UAE Armed Forces General Headquarters (GHQ) oversees military contracts and works closely with the Tawazun Economic Council (TEC), previously called the UAE Offset Programme Bureau, as one of the driving forces of growth in defence spending and manufacturing activities. The offset programme, in operation since 1992, mandates that international defence contractors doing business in the UAE invest in local ventures – many of which fall under the purview of the TEC. The GHQ oversees the country’s ground, naval and air forces, with enrolment expected to rise significantly in the near term on the back of a new military service requirement introduced in January 2014.

Security Measures

The Ministry of the Interior (MoI) comprises various fields, all of which work to ensure the UAE’s safety and security. It is primarily responsible for policing and traffic services, along with immigration and residence affairs, Civil Defence and corrective facilities. MoI services, provided to residents and the public and private sector, are considered to be among the widest reaching in the UAE and are carried out through federal and local police authorities. The largest of these is the Abu Dhabi Police (ADP), which has become a regional leader in the utilisation of security technology, including facial recognition software, CCTV monitoring and geographic information systems, as well as smart mobile and e-services that provide access to various services, such as traffic payments and crime reporting.

New policing methods are also growing in importance. “The overall policing philosophy has progressed in recent years. We now engage in more community policing,” Major General Nasser Al Nuaimi, secretary-general of the Office of the Deputy Prime Minister and Minister of Interior, told OBG. “It is a much more interactive approach that requires engaging the community on a more personal level. It necessitates an integration of tools and methods of both policing and community participation, but the results are more aligned with what we try to achieve as the MoI on the safety and security front.”

National security concerns are addressed by entities like the Defence Contractors Council, which was established to facilitate communication between the private sector and the TEC; the Critical Infrastructure and Coastal Protection Authority; and the National Emergency Crisis and Disaster Management Authority, established in 2007 with a mandate to formulate a national emergency response plan.

Aeroospace

In the aerospace sector, the federal General Civil Aviation Authority was set up in 1996 to facilitate industry growth, overseeing the air-navigation system and other safety-related operations, while Abu Dhabi Airports, established in 2006, operates the emirate’s airports, including Abu Dhabi International Airport (AUH), in addition to the Gulf Centre for Aviation Studies and Abu Dhabi Duty Free. Abu Dhabi Airports is currently overseeing a $3bn expansion at AUH, which includes the construction of a new terminal building – the Midfield Terminal Building, which is scheduled to open in 2017.

The most significant commercial player is Mubadala Development Company, founded in 2002 and active in the aerospace industry since 2006. Under its stewardship, the emirate’s aerospace sector is developing into a leading global provider of MRO services, as well as rapidly expanding into the OEM segment – largely through developments at its subsidiary, Strata, which operates facilities in Al Ain.

The UAE Space Agency, meanwhile, was established in June 2014 and charged with organising, supervising and managing the nation’s burgeoning space sector. The agency reports to the Cabinet and enjoys financial and administrative independence, providing technical and advisory support for related stakeholders, including the Emirates Institution for Advanced Science and Technology (EIAST), which is overseeing the UAE’s planned 2021 Mars probe.

Defence

Rising geopolitical tensions have led to increased defence spending in the GCC in recent years. Figures from the UK’s International Institute for Strategic Studies (IISS) estimate that regional defence allocations rose to $173bn in 2013, up nearly 40% from $124bn in 2010. According to UK-based military intelligence firm IHS Jane’s, the UAE is the second-largest defence importer in the Middle East, after Saudi Arabia. Indeed, the country signed over Dh10bn ($2.7bn) worth of contracts at the 2013 International Defence Exhibition and Conference alone, with spending projected to increase substantially in the coming years.

According to an April 2014 article in The National, the UAE’s overall military budget is expected to rise to Dh27.4bn ($7.5bn) in 2018, up from Dh25.1bn ($6.8bn) in 2014, while service and maintenance spending will increase from Dh5.1bn ($1.4bn) in 2014 to Dh6.3bn ($1.7bn) in 2018. IHS Jane’s, meanwhile, reported in February 2014 that the UAE is expected to more than double its spending on military imports between 2009 and 2015. The firm found that only Iraq and Saudi Arabia will outpace the UAE in defence imports in 2015, with the UAE’s imports expected to rise from $1.4bn in 2009 to $3.13bn in 2015. Regional spending will remain on an upward trajectory well into the future. US consultancy Avascent Analytics projects that the Middle East will spend more than $300bn on defence by 2019, including $100bn in yet-to-be-awarded allocations. At the same time, spending has declined in the US and Europe. The US cut its military spending by more than $50bn in 2013, while IHS Jane’s reports that Saudi Arabia, the UAE and Oman will import a combined $9.3bn worth of military goods, compared to $8.7bn for all of Western Europe.

This makes Middle Eastern markets highly attractive to US and European manufacturers, and has contributed to rapid advancement in the UAE’s domestic defence manufacturing industry. Additionally, the formation of EDIC, as a larger and more comprehensive sector player, has the potential to provide significant opportunities for international partners and boost industry growth.

Offset Influence

With military imports rising, contractors including France’s Dassault, which manufactures the Rafale fighter jets; the UK’s BAE Systems, which manufactures Typhoon jets and is a major partner on the F-35 jet; and the US-based Lockheed Martin, which manufactures F-16, C-130 and F-35 jets, have increased their market presence over the course of the last decade, with recent deals highlighting the government’s commitment to enhancing domestic knowledge and technology transfer under its offset programme.

For example, in February 2013 the government announced that it had selected Lockheed Martin as the preferred bidder for its planned Diamond Shield integrated air and missile defence system, which is expected to span the entire GCC region upon completion. Lockheed Martin gained preferred status for the project after having establishing local partnerships under the offset programme. In 2011 it joined Abu Dhabi’s Advanced Military Maintenance Repair and Overhaul Centre (AMMROC) joint venture, to support the maintenance of the UAE’s military aircraft. That same year it hosted an Industry Collaboration Forum in order to search for new areas in which it could collaborate with local industry.

In January 2014 the Pentagon notified the US Congress of a possible $270m weapons and equipment deal between Lockheed Martin and the UAE. This agreement is expected to be part of a larger, multi-billion-dollar contract for 30 F-16 fighter jets, though the deal has yet to be confirmed. With Lockheed Martin’s early successes partially attributed to its offset commitments, other contractors have taken their cues, setting the stage for future offset partnerships and wider industry expansion.

This followed a December 2013 decision by the UAE government to not go ahead with previously proposed plans to purchase 60 Eurofighter Typhoon jets from BAE Systems. Ian King, the company’s CEO, told local media that the aircraft were able to meet the country’s “very exacting requirements”; however, the final terms could not be agreed upon. Despite this setback, the British company is continuing to work with the UAE government to provide high-tech intelligence and analytical tools, as well as solutions in the fields of cyber security, financial crime and communications intelligence.

In October 2014 BAE Systems released a new military-grade system for protecting industrial facilities and national infrastructure, which is expected to attract key buyers from the Middle East. “The UAE is very important to BAE Systems; it is a strategic priority market. We have learned what we need to do differently in order to achieve success,” Charlie Simpson, director of BAE Systems’ UAE division, told OBG. “The main message for us is that partnering is core to our strategy and a demonstration of our long-term commitment. To get that right, the business needs to be assured of long-term success, so we are taking the time now to find that right partnership.”

Indeed, while the majority of the UAE’s military hardware has historically been sourced from foreign suppliers, the country’s domestic defence manufacturing industry has shown impressive growth in recent years, bolstered by offset obligations and a strong government investment strategy that has seen national entities partner with leading global manufacturers to build up domestic capabilities.

Maintaining this level of growth in the sector going forward will likely present some challenges. “The long-term sustainability of the aerospace and defence industry will require further investment in cutting-edge research and development if we truly want to compete globally and become an international exporter of products and services,” Grant Skinner, the executive director of aerospace and defence services for Mubadala, told OBG.

National Service

The government’s goal of building up its domestic capabilities extends beyond military hardware, as evidenced by the introduction of the National Service, mandatory for male Emiratis aged 18 to 30. According to the law, which was passed in January 2014, recruits without a high school education are required to serve for two years, while those with a diploma are expected to serve for nine months. The service is optional for females.

The IISS estimates that the size of the UAE Armed Forces stands at 51,000, with an army of 44,000, a navy of 2500 and an air force of 4500. Mandatory service is expected to create an army reserve twice that size, consisting of retired soldiers and national service programme graduates. “The National Service will have a positive impact in terms of raising awareness regarding potential careers in the area of policing and security. We anticipate that a much larger pool of students will be applying to the police academy in the coming years,” Al Nuaimi told OBG.

With this new law, the UAE has become the second nation in the GCC to introduce compulsory service in recent years, following the 2013 decision by the Qatari government to approve a bill introducing three to four months of service for men aged 18 to 35. Kuwait is also considering reintroducing compulsory military service, according to an October 2014 report in Monitor Global Outlook.

The UAE’s decision likely ties into a December 2013 move by GCC members to create a joint military command, which is expected to comprise 100,000 servicemen and women and be based in Riyadh. At the same time, GCC members voted to establish the Gulf Academy for Strategic and Security Studies, which will be located in the UAE.

Training Initiatives

Outside of the armed forces, the government has launched a range of training programmes in recent years – many through the MoI and the ADP – aimed at bolstering its national security initiatives and applying international best practices to the domestic security sector.

At the MoI, for example, career development extends all the way to the PhD level, with the Diwan Expert Programme, which was established by the MoI in 2001. The programme selects around 30 of the best students from the ADP’s police academy and enrols them in an eight-year career track combining specialised service and international education.

Students are supported financially for the duration of the PhD programme and focus on a specialised discipline. After completing their studies, they will apply the knowledge they have gained to police practices in the emirate. An estimated 300 students are currently enrolled at different levels of the programme, training at academic institutions and through work placements in leading police forces in the UK, the US, Canada, Australia and Europe.

“The development of a comprehensive policing and security force primarily resides in the development of its human capital,” Al Nuaimi told OBG. “A concerted effort has been made to educate, train and provide financial support to those who wish to pursue a career in this field. That is why we have created initiatives like the Diwan Expert Programme.”

Training

More recently, Law No. 7 of 2013 established Rabdan Academy, which offers education and training standards in conformity with the UAE’s qualifications framework, QFE mirates. Rabdan provides nationally and internationally recognised qualifications to serve the needs of various national security agencies in the fields of safety and security, defence, emergency preparedness and crisis management. The academy is unique in that it provides multi-agency training across the full educational spectrum, from vocational training to post-graduate programmes. It offers a wide range of courses and qualifications to supplement and support the provision of existing agencies, with a focus on courses that enhance and reinforce joint and combined operations. Enrolment stood at 282 students as of March 2014, with a student body made up of the staff of various stakeholder organisations.

In April 2014 Rabdan signed memoranda of understanding (MoUs) with the GHQ, MoI and Tawazun Safety, Security and Disaster Management City (Jaheziya). These agreements serve to outline the academic support that Rabdan will provide to each organisation’s training centres, as well as detail the academy’s goal of attaining greater international recognition and formal accreditation from the Ministry of Higher Education and Scientific Research. Under the MoUs, Rabdan will also form a joint committee with each of the partner organisations to monitor cooperation and provide ongoing guidance.

Rabdan was the first in the UAE to offer bachelor’s of science programmes in business continuity and integrated emergency management. Although the academy’s offers have been focused on government clients so far, there are plans to engage private sector players in the oil and gas industry, as well as other firms operating critical infrastructure or requiring disaster management capacity.

Over the long term, Rabdan Academy hopes to export its training expertise to international markets. Faisal Al Ayyan, the executive vice-president of Rabdan Academy, told OBG. “Greater integration among government departments, and to a certain extent private organisations across different sectors, is required to ensure a safer and more secure environment against future threats, both for personnel and the residents of the UAE.”

New Concerns

These training initiatives have come in response to a growing and diverse array of security concerns facing the UAE and wider GCC. With Abu Dhabi in the middle of launching its civilian nuclear energy programme, scaling up hydrocarbons extraction activities and moving ahead on a host of mega-projects, protection of critical infrastructure has garnered increased attention in recent years.

This has been reflected in spending and legislation. The US Commerce Department’s International Trade Administration reported in February 2014 that the UAE is expected to double homeland security spending over the next 10 years, from $5.5bn to more than $10bn, with annual spending on airport security alone forecast to reach $57.7m in 2015.

In April 2014 The National reported that the UAE is expected to pass a new law on the protection of critical infrastructure, covering the energy sector, nuclear power plants, oil and gas production facilities, water treatment and electricity. The proposed law will help form a national policy, joining a host of legislative reforms aimed at enhancing national security, including an updated anti-terror law, promulgated in August 2014, and new cyber security laws that will see the UAE significantly improve upon the protection of its digital infrastructure.

Cyber Security

Although the UAE’s fibre network is considered one of the most well-developed in the world, the country, like many others in the region, still has a high risk of electronic attacks and digital threats, as evidenced by the 2012 cyber attacks on Saudi Aramco, Saudi Arabia’s national oil company, in which malware dubbed Shamoon caused the company to lose significant digital capabilities.

In late 2012 the UAE passed two digital security laws: Law No. 5, the Cyber Crimes Law, and Law No. 3, which established the National Electronic Security Authority (NESA). The NESA is mandated with protecting communication and information systems in the country, and enforcing the Cyber Crimes Law – which covers offenses ranging from electronic forgery to hacking and electronic blackmail, as well as intellectual property rights, distribution of illegal content and threats to national security.

In June 2014 the NESA released an array of key strategies, policies and standards aimed at aligning national cyber security efforts, publishing the first versions of the National Cyber Security Strategy (NCSS), the Critical Information Infrastructure Policy and the UAE Information Assurance Standards. For its part, the NCSS includes a government roadmap for the protection of national infrastructure, while the information assurance framework outlines approaches for national asset protection at the entity, sector and national levels.

Aerospace

Mubadala and national carrier Etihad Airways have been the driving force behind the emirate’s rapid aerospace and aviation growth in recent years. Etihad Airways, which was launched in 2003, has committed billions of dollars in recent capital expenditure to expand and upgrade its fleet. In November 2013 the company signed its largest fleet order ever – a $67bn deal for 87 Airbus and 56 Boeing aircraft, which will be powered by 127 GE Aviation, 115 Rolls-Royce and 52 CFM engines.

Mubadala, which expanded into the aerospace sector three years after Etihad Airways’ inception with a mandate to develop a fully integrated aviation industry comprising both MRO and OEM activities, already offers MRO facilities for GE Aviation and Rolls-Royce engines.

The company has recently moved to expand the scope of these facilities with the establishment of two new centres of excellence, demonstrating the growing relationship between the government and the private sector, as well as the government’s commitment to the drive for economic diversification under Economic Vision 2030.

AMMROC and Strata are the company’s showpiece subsidiaries, with its MRO portfolio also comprising Turbine Services and Solutions (TS&S), which operates as an MRO facility for both industrial gas turbines and aerospace engine OEMs throughout the MENA region, such as Rolls Royce, International Aero and GE Aviation. AMMROC provides MRO services in partnership with Lockheed Martin and Sikorsky Aerospace, while Strata is leading the charge in developing OEM activities, as well as manufacturing composite aerostructures.

“Airbus and Boeing were eager to invest in the region. Additionally, the government had a vision for training and educating the Emirati population,” Badr Al Olama, the CEO of Strata, told OBG. “The role of the private sector was then to provide specific training on aircraft manufacturing, and this relationship is what allowed the aerospace sector to emerge from its humble beginnings.”

Abu Dhabi Aircraft Technologies, previously a fully owned Mubadala subsidiary, operated as the region’s largest MRO facility until its engineering and maintenance teams, hangars, paint facilities and component workshops were acquired by Etihad Airways in May 2014, to be used for maintaining its new Airbus A380 and Boeing B787 fleet, while Mubadala retained the engine-focused MRO segment.

Aligned with TS&S, the new engine MRO business signed deals in November 2013 with Rolls-Royce and GE Aviation to establish next-generation Trent XWB and GE nx MRO centres of excellence in Al Ain, following a combined engine parts production commitment of $1bn from both manufacturers. The GE nx MRO facility will be the world’s first quick-turn facility for the high-efficiency engines, which are used in Boeing’s 787 Dreamliner aircraft. Mubadala’s commercial MRO network also includes Zurich-based SR Technics, which manufactures critical components for aircraft, including Boeing’s 787 Dreamliner.

Strata

Launched by Mubadala in 2009, Strata is poised to become a leading global aerospace player, following years of steady expansion at its Al Ain plant, which opened in 2010. Strata is a key tier-one partner for Airbus in the Middle East, handling composite work packages, including ailerons, flap track fairings and spoilers, for the wide-body A330 family, in addition to flap track fairings for A380 aircraft. The firm reached a milestone in February 2013, when it unveiled a fully assembled aileron for an Etihad Airways A330 aircraft, marking the first time that this part had been manufactured in the UAE by Emiratis.

A few months later, at the 2013 Dubai Airshow, Airbus and Strata expanded their existing partnership further, with Airbus awarding Strata an additional $2.5bn contract to cover the procurement of pre-preg materials, in addition to composite and metallic aircraft structure manufacturing. At the same airshow, Boeing signed a $2.5bn deal with Strata to supply the company with composite and metallic aviation structures, expanding on an earlier 10-year agreement announced in April 2012, in which Strata became a supplier of empennage ribs for the Boeing 777 and 787 aircraft, as well as of vertical fins for the 787 Dreamliner, marking Boeing’s first direct supplier composites contract with a company based in the Arab world.

Skinner told OBG, “On the heels of the announcements at the Dubai Airshow, it is our hope to roll out half a dozen new businesses in the next five years, specifically in areas such as MRO and eventually engine parts manufacturing.” Strata’s current contract book for OEM is estimated at some $7.5bn; however, it has not yet achieved profitability, despite reporting Dh220m ($59.9m) in revenues in 2013. Nonetheless, company officials told local media in May 2014 that they expect Strata to break even by the end of 2015, presumably through revenue generated from new supply contracts with a wider variety of international players.

According to existing plans, 2015 should see the company’s plant expanded by 40%, which should allow for an additional Dh1bn ($272.2m) in revenues, assuming the existing 8-10% profit margin can be maintained. Meanwhile, a second plant is also set to be developed, at 2 to 2.5 times the size of the existing facility, and is scheduled to open in 2017.

The new plant will focus on advanced composite aerostructures, manufacturing more complex, higher-margin items, while the initial plant will focus on providing the necessary inputs. As part of the expansion plans, Strata has partnered with leading education institutions to help shift the company’s focus away from lowering production costs and towards a more quality-centric approach.

The company’s progress has also had a positive ripple effect on domestic industry. For example, in July 2014 the company signed a 10-year, $16.5m agreement with Dubai-based Premier Composite Technologies (PCT). Under the agreement, Strata will outsource a central function in the treatment of composite materials for production of A380 flap track fairings to PCT. Furthermore, the additional training that is set to be offered as part of its expansion plans will help to provide employees with skills for other sectors like foundries and shipbuilding.

Nibras

The Nibras Al Ain Aerospace Park (Nibras) is a multi-faceted project under joint development by Mubadala Aerospace and Abu Dhabi Airports. Located on a site spanning 25 sq km of industrial projects, office space and mixed-use residential zones, the 5-sq-km aerospace park has already seen several local players establish operations, including Strata; Horizon Flight Academy, which provides helicopter training for civilian and police pilots; and Abu Dhabi Polytechnic’s Al Ain International Aviation Academy, which offers aircraft maintenance and air traffic control programmes. AMMROC will act as anchor tenant and plans to move into a purpose-built facility at Nibras, which will be one of the world’s largest military MRO facilities upon completion.

The project’s first phase is expected to run through 2016, with Mubadala inviting expressions of interest in May 2014 for an infrastructure construction contract that includes roads, sewer, drainage, water, power, telecoms, irrigation and earthworks. Phase two, which will be completed in the mid-2020s, will see Mubadala and Abu Dhabi Airports engage in efforts to attract new companies and foreign investment, with an estimated 10,000 workers expected to be employed by the end of phase three.

Lift Off

The UAE officially entered the global race to explore outer space in July 2014, when Sheikh Khalifa bin Zayed Al Nahyan, president of the UAE and ruler of Abu Dhabi, signed a royal decree establishing the UAE Space Agency and announced plans to launch a scientific voyage to Mars by 2021. This marks a major turning point in the nation’s development, and introduces space technology as a new driver of economic diversification. The planned probe, which will take nine months to complete its journey to Mars, will place the UAE in a group of only nine countries with space programmes to explore the planet. The probe is expected to launch in 2021, on the 50th anniversary of the UAE’s independence.

In October 2014 the government announced a seven-year partnership between the UAE Space Agency and EIAST, which was established in 2006 and has been tasked with managing all stages of the Mars probe project. The deal will see the UAE Space Agency supervise and finance EIAST’s Mars mission, as well as establish the project’s timeline and related legal and financial frameworks.

Abu Dhabi is already at the forefront of regional space programming, with Mubadala-owned Yahsat announcing plans in September 2014 to launch a third satellite, Al Yah 3, in 2016, following the successful launches of Y1A and Y1B in 2011 and 2012, respectively. Earlier in August 2014 the government announced that the UAE’s next satellite – KhalifaSat – will be manufactured by Emiratis at a satellite manufacturing facility located in Dubai, which is expected to open by early 2015.

Perhaps most promisingly for the emirate’s private space industry, in 2009 Sir Richard Branson’s Virgin Galactic partnered with Aabar Investments. Aabar took a 35% stake, worth an estimated $300m, in Virgin Galactic, which is expected to open a spaceport at Nibras. In statements to local press in February 2014, Branson said he hoped to open the planned spaceport within the next two years, which would offer commercial flights to space.

Unfortunately, plans for a near-term rollout of commercial space flights took a hit in October 2014, following the fatal crash of Virgin Galactic’s first spaceship. Nevertheless, an estimated 800 people have made financial commitments to ride on SpaceShipTwo – a six-passenger, two-pilot suborbital spaceship owned by Virgin Galactic – with tickets selling for $250,000 each. Demand for space tourism is expected to remain strong, and Abu Dhabi seems to be well positioned to benefit from industry growth.

Outlook

Abu Dhabi’s aerospace and defence industries are poised to enjoy considerable long-term growth as the government moves to enhance economic diversification and secure critical national infrastructure against an increasingly unstable geopolitical backdrop. National military service and a host of new training programmes offered by the MoI and other public entities will help the government realise its goal of developing a robust national defence force, while at the same time bolstering national employment and greater skills development. In addition, further developments in both defence manufacturing and procurement, as well as new projects and growing investment in the rapidly expanding aerospace industry, should help Abu Dhabi to realise its broader aim of developing a more robust, secure and knowledge-based economy.

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The Report: Abu Dhabi 2015

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