Efforts are under way to significantly expand domestic military and aerospace manufacturing capacity and foster a localised defence ecosystem. The country is pushing for greater localisation of its defence industry in order to reduce military hardware imports and stimulate the Kingdom’s industrial base. While still in its preliminary stage, the localisation drive is expected to accelerate growth in sectors ranging from ICT to industrial equipment, with the aim of generating sustainable employment.
Although streamlining military spending costs stands as a core motivation in a time of declining state revenue as a result of falling international oil prices, Saudi Arabia also faces pressure to achieve greater self-sufficiency given recent limits on arms exports from key manufacturers. New purchases from the country’s main sources of arms imports, the US and the UK, often take a considerable amount of time to be approved, impacting the country’s ability to expand its defence capacity in line with its short-term security and development goals. Localisation is set to help reduce dependency on external powers, increase national sovereignty, and improve turnaround times for spare parts and logistics.
As of November 2019 the country’s localisation rate in terms of defence expenditure was thought to be between 2% and 5%, according to government estimates. As part of Vision 2030, the government aims to localise 50% of military spending by 2030. In the process it plans to create around 100,000 direct and indirect jobs for Saudi nationals. Under the strategy, the Kingdom also plans to produce or assemble half of its defence equipment needs domestically.
Initial stages of localisation have included developing domestic industrial capacity in lower-value segments, to provide spare parts, armoured vehicles and basic ammunition. In 1984 Saudi Arabia enacted a defence offset policy to attract technology, skills and jobs to the Kingdom as part of deals with major international firms. However, upon its release in 2016, Vision 2030 acknowledged that the offset policy had not achieved the desired results, and the rate of overall localisation remained low. More recently, the country has required that the final assembly of imported arms to be undertaken in Saudi Arabia. This has impacted several major arms import projects, including the $29.4bn 2011 deal for 154 Boeing F-15SA combat aircraft, with 68 of the aircraft now set to be assembled in Saudi Arabia.
Building on these efforts, the Kingdom is targeting the localisation of higher-value-added sectors and more complex equipment, including military aircraft. It is also aiming to export locally manufactured arms both regionally and internationally. Saudi Arabia plans to achieve this through direct investments and strategic partnerships with leading companies in the sector. The aim of the latter is the implementation of technology- and knowledge-transfer programmes in order to build national expertise in manufacturing, maintenance, repair, and research and development (R&D). Ultimately, Vision 2030 foresees the development of an integrated national network of services and supporting industries Leading this initiative are two government bodies, the General Authority for Military Industries (GAMI) and Saudi Arabian Military Industries (SAMI), both of which were created in 2017. GAMI is the regulatory authority for localisation efforts and is tasked with creating policies to support the sector and facilitate the establishment of local defence supply chains. SAMI serves as a new defence manufacturing holding company to consolidate and expand existing local military industries. The government aims to grow SAMI to become one of the top-25 military industrial companies in the world by 2030 (see overview).
In order to better facilitate the Kingdom’s localisation drive, GAMI launched an online licensing approval portal in 2019. This covers licensing for military industries, military services, and the supply of military products and services. At the end of 2019 GAMI had issued licences to eight firms, expected investments of more than SR3bn ($799.8m). The year also saw the launch of GAMI’s Industrial Participation Programme (IPP), which gives precedence to localisation objectives in the issuing of military contracts to help develop local capacity and supply chains. Under the IPP, suppliers seeking to secure deals with Saudi Arabia will need to demonstrate how they will support industrial localisation and technology transfer. Speaking to local media in December 2019, Ahmed bin Abdulaziz Al Ohali, governor of GAMI, said that international partners had adapted well to the initiative, providing increased support to the development of domestic industrial and R&D capacity. In the same month GAMI announced the signing of its first agreement under the IPP scheme in a deal with the local unit of US defence contractor Raytheon to localise deep maintenance and refurbishment of its Patriot missile defence system. Under the deal, Raytheon Saudi Arabia will partner with domestic private sector companies and local universities to develop capabilities in strategic military industries.
In 2018 SAMI established two joint ventures with international firms. The first was signed with the Spanish state-owned shipbuilding company Navantia and focuses on outfitting two AVANTE 2200 vessels. The joint venture, SAMI Navantia Naval Industries, is responsible for combat systems 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.
The second deal was signed in March 2018, with US aerospace giant Boeing agreeing to establish a joint venture to perform maintenance repair and overhaul tasks on both fixed-wing and rotary military Boeing aircraft. In addition, a number of new joint ventures are in the pipeline and are expected to be rolled out over the next few years. As of January 2020, SAMI had signed over 25 agreements with international partners aimed at supporting the country’s military localisation strategy.
In January 2020 the Ministry of Finance announced that part of the $29.4bn windfall raised through Saudi Aramco’s December 2019 initial public offering would be allocated towards developing the domestic defence industry. Earlier, in November 2019, GAMI announced that it would increase the share of the military budget allocated to R&D from 0.2% to 4% over a 10-year period. The shift would bring scientific research funding in line with other major military powers, as well as facilitate the development of new weapons and security technologies, and support economic diversification.
While the localisation of military industries stands to unlock an estimated SR30bn ($8bn) and contribute SR90bn ($24bn) to non-oil GDP over the next decade, a number of hurdles will need to be overcome. Localisation of production may come at a short-term cost to efficiency and the pace of development, despite bringing longer-term strategic and economic gains. The local industry will need time to develop the necessary expertise and industrial capacity to compete with established international players. This dynamic will become particularly important as the Kingdom moves beyond its shorter-term objective of localising military spending towards establishing itself as a regional and global exporter of military goods and services.
Nevertheless, the country possesses significant human capital in terms of engineering and ICT that can be mobilised for the development of an advanced domestic military manufacturing industry. To support this effort, Walid Abukhaled, chief executive for strategy and business development at SAMI, stated that there is a need to collaborate with the Technical and Vocational Training Corporation to expand specialised defence and aerospace education for young Saudis. The new IPP framework is set to facilitate increased local production in addition to enabling technology transfer and improving human capital. However, it will require more than increased training to move beyond being an assembler of foreign technology to becoming a sectoral innovator in its own right. Both joint ventures and increased domestic R&D funding are set to support this objective, but it will also require efforts to create a more innovative business environment. “Saudi Arabia will be able to achieve its targets by involving the private sector in the military industry and by developing a strong regulatory environment governed by GAMI,” Muneer Bakhsh, CEO of GDC Middle East, a Public Investment Fund aerospace company, told OBG.