Saudi Arabia’s defence expenditure was the sixth highest worldwide in 2021, behind the US, China, India, Russia and the UK. The localisation of industry, and enhanced research and development (R&D) are core to Vision 2030, the government’s long-term blueprint for development. Given the defence sector’s traditional prominence in the annual budget, it is among the areas targeted to propel the upskilling of the national workforce and create more jobs.
Defence-related business forms a key component of Saudi Arabia’s close economic relationship with the US. While more deals have been signed recently between the two nations, the Kingdom’s drive to expand the industry has led it to broaden its portfolio of strategic partnerships and attract international security, aerospace and defence manufacturing entities to establish operations at home. Opportunities for technology and knowledge transfer are key requirements for said partnerships, with many recently signed cooperation agreements set to boost local training, education, and research, development and innovation (RDI) capacities.
Structure & Oversight
The Ministry of Defence oversees defence sector operations, consisting of the land, air, naval, air defence and strategic missiles forces, with a combined total of around 227,000 military personnel working under its jurisdiction.
The General Authority for Military Industries (GAMI) and Saudi Arabian Military Industries (SAMI) were both established in 2017. GAMI is responsible for licensing procedures and formulating security- and defence-related strategies, policies and regulations while handling the procurement of military equipment, munitions and apparel. SAMI, meanwhile, is a state-owned enterprise established by the Public Investment Fund, the Kingdom’s sovereign wealth fund, to support the Vision 2030 goal of achieving a 50% share of defence spending on local industry by 2030. “The plans to localise more than 50% of its military expenditure is a natural course for the Kingdom to take as it grows its defence sector under Vision 2030. Foreign businesses need to adopt a different approach to working within the Kingdom, with a focus on a partnership model,” Simon Barnes, managing director of BAE Systems Saudi Arabia, told OBG.
In addition, the Saudi Space Commission was established in 2018 with the mandate to develop research and industrial capacities that are relevant to the nascent and potentially highly lucrative space segment. In September 2021 the General Authority for Defence Development was established to formulate strategies that will guide RDI in technological defence systems.
In the cyber space, the National Cybersecurity Authority (NCA) was launched in 2017 to reduce the risks facing information and technology assets, and ensure that the Kingdom’s digital economy has a secure platform for growth. The NCA has an important function in overall national security as it helps defend critical digital infrastructures and systems that could be vulnerable to hostile cyberattacks – a threat that has risen worldwide since Russia invaded Ukraine in February 2022 (see analysis).
Strategy Development
The three foundational goals of GAMI’s strategy for defence sector development involve strengthening military acquisition, military industry, and military research and technology. To achieve those goals, GAMI will work to reinforce the Kingdom’s strategic autonomy and military readiness, and build a sustainable local military industry. It will also promote interoperability across the defence ecosystem and transparent and efficient expenditure. Since GAMI was launched the percentage of public defence spending accounted for by local industry has more than doubled, to about 8%, demonstrating the efficacy of its strategies and policies.
However, given the significant increase required to reach the aforementioned target of 50% by 2030, GAMI has ramped up its policy output since 2020 to accelerate growth. May 2021 brought the announcement of the Industrial Participation Programme (IPP), through which the government plans to invest $20bn over the coming decade, with half of that figure going to general defence manufacturing, and the other half earmarked for research and development. “One way to boost R&D investment is to align defence and non-defence sectors. Such collaboration opens the doors to companies who have dual-use technologies to enter and support local R&D,” Barnes told OBG.
Building on the IPP, in February 2022 GAMI announced its Human Capital Strategy for the military and defence sector. The core goals of the strategy involve incentivising partnerships with local and foreign private players to enhance sector-related skill and knowledge cultivation, and boost local research capacity. GAMI will design education and training programmes for up to 800 essential skills spread across 172 occupations. It is targeting the creation of employment opportunities for 30,000 technicians, 25,000 service workers and 12,000 engineers. Military- and defence-related university scholarships will also be offered to Saudi students. Empowering women to obtain training and employment in the sector is another strategic priority.
Public-private collaboration is seen as key to the success of this initiative. Early evidence of international appetite for involvement includes the signing of memoranda of understanding (MoUs) with UK-based Cranfield University and Italian multinational aerospace, security and defence technology solutions provider Leonardo. Both deals are designed to boost local RDI, education and production capabilities.
Public Expenditure
Since 2017 public spending on defence has gradually declined as the government presses ahead with its privatisation initiatives – intended to reduce overall public expenditure and diversify the historically oil-dependent economy. However, the sector still receives one of the highest annual budget allocations of all areas of the economy. According to the World Bank, the government spent $70.4bn, equal to 10.2% of GDP, on its defence sector in 2017. By 2020 that figure had dropped to $57.5bn, or 8.4% of GDP. This trend continued through 2021 and 2022, as SR182bn ($48.5bn) and SR175bn ($46.7bn) were allocated, respectively, with the latter amounting to around 18% of the overall budget.
In addition to its ongoing localisation drive, priority projects for the government include upgrades to the King Salman Airbase, the construction of a new primary facility for the King Faisal Air Academy and the modernisation of the National Guard. Parallel efforts to protect locations of strategic importance from attacks by unmanned drones appear likely to continue. To that end, in November 2021 the US government approved a sale to the Kingdom of 280 advanced medium-range air-to-air missiles and 596 missile rail launchers at a cost of $650m.
Doing Business
GAMI has removed restrictions on foreign investment in the defence sector, stating in its “Saudi Military Industries Highlights” report for the first half of 2021 that 100% foreign ownership of foreign investments is now allowed. Licensing procedures have also been streamlined for transparency, leading to a surge in local and foreign companies applying for and obtaining a GAMI licence. In the fourth quarter of 2019, there were five GAMI-licensed companies: by the second quarter of 2021 there were 99. Of that total, 85% were local companies, 9% were local-foreign partnerships and 6% were foreign-owned businesses. GAMI also launched a Military Industries Marketplace to connect licensed entities with investment opportunities in the defence sector.
Joint ventures with local entities have been a popular avenue for foreign investors wishing to enter the Saudi defence sector. According to the International Trade Administration, a division of the US Department of Commerce, under the general model of such arrangements, local partners focus on business development and government contracts while foreign investors handle manufacturing and sales fulfilment to meet the terms of contracts. Notably, by 2024 any foreign company wishing to conduct business with the Saudi government will have to establish a headquarters within the Kingdom.
Strategic Partnerships
Defence-related cooperation between Saudi Arabia and India was reinforced in December 2021 when a deal was announced between local firm Power for Defence Technologies and India’s DPSD Bharat Electronics. The agreement will see the latter implement tech solutions in Saudi Arabia, including advanced threat-detection suites with radar, coastal radar systems and drone protection systems, among others.
Meanwhile, in March 2022 US defence giant Lockheed Martin announced that it plans to invest $1bn in the Saudi defence industry, splitting that sum between manufacturing, R&D, and maintenance, repair and overhaul (MRO) activities. This is to be achieved through partnerships with local companies that will feature local workforce upskilling initiatives. GAMI has since confirmed that Lockheed Martin intends to move the production of parts for its THAAD missile interceptor systems to the Kingdom. In addition, the company plans to increase Saudi Arabia’s integration into its global supply chains as well as expand its exports to the Kingdom.
The Saudi government is working to improve investor relations across the economy, and in recent years it has built the hosting of trade shows and conventions into its development strategies. In March 2022 the Kingdom’s inaugural World Defence Show, which will be held every two years, took place in Riyadh, providing a platform to showcase investment opportunities in the Saudi defence sector to a global audience.
The show focused on defence interoperability initiatives and ultimately led to the announcement of 12 MoUs, worth $7.9bn, that will strengthen multiple areas of the Saudi value and supply chains. US-based Raytheon Technologies signed an agreement announcing that its subsidiary, Raytheon Saudi Arabia, will manufacture parts for its Patriot air and missile defence systems in the Kingdom.
China had a strong presence at the event, with state-owned defence manufacturer Norinco also investing. Other signatories include US-based aerospace and tech multinational L3Harris Technologies, and Austrian weapons and military equipment manufacturer Glock, while firms from France and Italy, among others, also agreed to deals. Meanwhile, SAMI announced it had established financing agreements worth $1.9bn with local banks to help fund the deals.
Aerospace
Through Raytheon Saudi Arabia and subsidiaries Collins Aerospace and Pratt & Whitney, Raytheon Technologies has been a key player in the Saudi aerospace segment since 2017. Collins Aerospace manufactures avionics displays and communications systems and carries out related MRO works. It also provides aircraft interiors for commercial aviation manufacturers, such as Boeing and Airbus, that operate in the Kingdom. Pratt & Whitney has manufactured engines for the Royal Saudi Air Force since 1981 and provides engines for various Saudi Arabia-based commercial aircraft families.
SAMI has moved to strengthen ties with French industry to expand capacity, announcing in December 2021 that it had entered into joint ventures (JVs) with Airbus and Figeac Aero. Under the terms of those agreements, the former will carry out MRO works on Saudi-owned Airbus A330 multi-role tanker transport craft and Airbus C295 craft, with operations to start in 2022. The JV with Figeac Aero, meanwhile, places the aerospace components manufacturer as minority shareholder in the newly created SAMI Figeac Aero Manufacturing. SAMI, for its part, has partnered with the Saudi Arabian Industrial Investments Company to assume the controlling stake in the JV. SAMI Figeac Aero Manufacturing will receive an initial $50m investment from the partners for the construction of a specialised facility set to begin production of aluminium and titanium aircraft and rotorcraft components in 2024. SAMI also established SAMI Composites, whose 37,000-sq-metre facility commenced production of structural aerospace sub-assemblies for civil and military aviation craft in November 2021.
Space
The government plans to establish and reinforce strategic regional and international partnerships across its space segment. In October 2020 Prince Sultan bin Salman bin Abdulaziz Al Saud, chairman of the Saudi Space Commission, unveiled a $2bn investment package for the Kingdom’s space programme, stating that he envisages trillion-riyal growth in space-related business moving forwards.
There is significant room for expansion in the Saudi space industry, as evidenced by the current return on investment in the sector. For each riyal invested in space-related activities, the return is around SR1.81 ($0.48), compared to the equivalent of SR7-20 ($1. 87-5.33) in countries with more mature space industries.
International coordination will be essential as the global space industry develops. In May 2022 Saudi officials announced that the Kingdom had successfully secured US investment through the signing of two strategic partnerships to enhance cooperation across space-related activities. The new and advanced technologies required in this area present both risks and benefits for the future of cybersecurity. This is a key topic for discussion between the two countries as the aforementioned partnerships are ratified.
Outlook
There is significant international appetite for involvement in the Saudi security, aerospace and defence sector, with the mutually beneficial nature of cooperative partnerships and JVs proving attractive to multinationals. The government’s clear recognition of the need for thorough, transparent regulatory frameworks is a key driver of industrial growth. Continued agility in this area will be essential as the Kingdom works to achieve its defence localisation goals. In that respect, much hinges on the ability of the relevant authorities to enable synergy across the education, technology, defence and RDI ecosystems, and position the sector as a primary driver of local industry and human capital development moving forwards.
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