The world’s largest defence firms are battling to win lucrative contracts on offer in the Gulf region.
For a week every two years, a small English town in Hampshire comes alive to the sound of sonic booms and the smell of jet fuel.
Over the course of last weekend at Farnborough, thousands of plane-spotters and families thrilled to a series of aerobatics and static displays featuring aircraft from vintage Spitfires to Boeing’s ultra-modern composite 787 Dreamliner. But it was in the five days prior to the crowd-pleasing spectacles in the air that the hard work was done on the ground.
For the world’s biggest aerospace and defence companies, the Farnborough trade show is their best opportunity to showcase their wares and negotiate new contracts. And the target market in which jostling executives from 1,500 firms were all trying to gain a foothold was the Gulf, now the world’s most active defence market.
From the civil aerospace side, the story is well known. Meteoric fleet growth and billions spent on infrastructure have left Gulf airlines on the cusp of global domination. While the figures in 2010 look strong, with passenger and cargo traffic continuously being sucked through hubs in Dubai, Abu Dhabi and Doha, they are nothing to what is planned for the next fifty years, if Emirates’ recent mammoth A380 purchase and the opening of Dubai’s second airport turn out to be a winning bet. But in the less-publicised world of defence spending, the Gulf is also showing a very powerful hand. The fact that the region’s abundant petrodollars are frequently being recycled back into Western defence manufacturers’ coffers is hardly a new concept, but as traditional economies swerve towards austerity measures to reduce their deficits, the GCC is increasingly being seen as the only region that is still spending.
“Global suppliers firstly place a great premium on the Gulf market because there are only so many markets that are still buying,” says Dan Darling, Europe and Middle East military markets analyst for US-based consultancy Forecast International. “Secondly, what they’re buying is very expensive. We’re looking at whole platforms, so jet fighters, and air defence missile systems, and effectively any aviation from helicopters to transport helicopters to tactical and strategic airlift. It’s still a robust market, despite the recession.”
And spend they most certainly are. Last year, Abu Dhabi forked out over $5bn in contracts at the Gulf’s biggest defence expo, International Defense Exhibition & Conference (IDEX). 2009 also saw the delivery of the first of 72 Eurofighter/Typhoon combat aircraft from the UK on the back of a $9.5bn deal in 2006. Oman is looking to upgrade to Typhoons as well, and Kuwait and the UAE both have their eyes on France’s new Rafale jet fighter. But while these are undoubtedly big sums, they shrink next to the size of the region’s national defence budgets, which are worth taking a look at in some detail.
Top of the list, unsurprisingly, is Saudi Arabia, which has been projected by the Stockholm International Peace Research Institute (SIPRI) to spend just under $40bn on defence this year. “Saudi Arabia puts around 30 percent of its regular state budget into defence — so that’s around a third,” says Darling. “And we estimate it low — some agencies put that figure at 35 to 40 percent. Our estimates put it at around 29-31percent.”
Elsewhere, while figures for the UAE — the Gulf’s second-biggest market — are unclear, SIPRI says that the country spent just over $13bn on the sector in 2007; it’s likely that the figure is now far higher. The country was also the world’s fourth-biggest importer of conventional arms over the last five-year period with six percent of the global share, behind China, India and South Korea. In Oman, the SIPRI data shows that the Sultanate spent $4bn on defence in 2009, an incredible sum given the size of the country’s economy. In fact, US government figures in the last few years show that until very recently, Oman held the dubious honour of expending the largest portion of GDP on defence in the entire world – at just over ten percent in 2007. But even that is nothing compared to 1988, when the country was estimated to have spent over eighteen percent on the sector.
Taken as a whole, Forecast International data shows that the GCC is set to spend $68.3bn on this sector in 2010, with the figure rising by 22 percent to $83bn by 2015. That sum is the exact equal of Qatar’s entire GDP in 2009, according to the latest IMF estimates. Put another way, our estimate — based on military expenditure data provided by SIPRI and population data provided by the CIA World Factbook — is that the six Gulf nations spent $1,533 on defence for every man, woman and child in the region in 2009, a figure that is roughly 35 percent more than comparative data for the UK in 2009. This breakdown also reveals that the UAE alone spends an estimated $2,622 per capita — a whopping 23 percent higher than the estimated $2,137 spent by the US in the same year.
So where is all this money going? In terms of the various verticals, significant sums are being poured into upgrading local air forces and navies, as well as the most recent up-to-date missile defence systems. Some countries have expressed serious interest in Unmanned Aerial Vehicles (UAVs), which have recently been playing such a key role in NATO’s operations in Afghanistan. And yet another area where the Gulf appears to be silently but slowly increasing investment is cybersecurity.
But if there is a blanket trend in the Gulf taking place right now, it’s the push to develop more in-house expertise. Given the prices they are paying for foreign technology, that will come as no surprise. But yet another advantage of this policy is the added potential for job creation, which is of special interest in countries with low employment like Saudi Arabia. International firms have long known this, and have made special efforts to partner with local players in an attempt to create an indigenous industry. It’s a slow process, but the results are bearing fruit. Caracal, which is owned by the UAE’s Tawazun Holding, has developed a range of modern pistols and has signed contracts with a number of state security forces across the Middle East. But with one notable exception, Abu Dhabi Ship Building Company, home-grown firms that deliver complicated platforms to the market are still few and far between.
With 60 years of experience in the region, US manufacturing giant Boeing says that local partnerships — such as its relationship with Saudi aviation technical services provider Alsalam — bring benefits for both sides. “Local industry benefits from our position as the world’s largest aerospace company by opening the door to opportunities across the Boeing enterprise from traditional defence and commercial airplanes work, to R&D, internal services and beyond,” says Paul Olivier, regional vice president of international business development for Boeing Defense, Space and Security (BDS). “Alsalam is a strategic resource for providing the Kingdom with self-sufficiency in the aircraft maintenance field through technology transfer and training of Saudi nationals. It is the premier provider of military and commercial aviation products and services in Saudi Arabia.”
Asked whether countries in the GCC have the potential to become exporters as well as importers in this field, Olivier says that although those decisions are made at the government level, “that capability definitely exists”. And in the UAE, Boeing inked a deal with Mubadala that is intended to develop the country’s aerospace capabilities. In fact, Olivier says that the deal will see the world’s biggest aviation supplier help Mubadala Aerospace to become the region’s biggest aviation supplier. The Emirati company has just announced that it has plans to deliver its first homemade parts — flap-track fairings for A330s and A340s — to Airbus by the end of this year. Consultancy AlixPartners believes that the Middle East’s aircraft maintenance, repair and overhaul (MRO) sector is set to double to $4.4bn by 2019.
“The Saudis have increased their requirement for in-country activity from pure support for Tornado [a British jet fighter] to actual indigenous manufacturing and indigenous MRO,” says Brinley Salzmann, export director for ADS, the trade association that represents British companies active in the aerospace, defence and security industries. “Companies like BAE Systems are there [in Saudi Arabia], and I know Goodrich are looking very closely at locating in the region specifically to support the Typhoon fleet.”
Needless to say, international original equipment manufacturers (OEMs) aren’t entering these partnerships for altruistic reasons. With so many markets effectively tied up by particular countries — the Saudi air force is largely supplied by consortiums led by the UK, while the Kingdom’s land forces generally utilise US-supplied goods – shifting onsite manufacturing operations to the Gulf is a good way to get the upper hand with regard to future contracts. But in reality, it’s only the biggest global outfits that can really afford to take that route, and they are also aware that more onsite manufacturing means that their own global supply chains come under threat. As a consequence, the number of foreign SMEs currently active in the Gulf defence market is low.
But there are limits to what even virtually bottomless warchests can buy. As the source of 30 percent of the world’s conventional weapons supplies, the US must tread a geopolitical tightrope in deciding what products it can give out to whom. It should be highlighted that this is not a Middle Eastern problem; even stauncher US military allies such as the UK and France can also find access to the very latest military technology diplomatically denied. But the superpower’s policy towards its close allies in the Middle East region, which number not only every member of the GCC but also Iraq, Jordan, Egypt and Lebanon, hinges on what it refers to — somewhat euphemistically — as the QME, or qualitative military edge. This phrase refers to US policy towards Israel, and effectively means that the former will do everything in its power to ensure the latter’s military superiority over its neighbours — which include the Arab states of the Gulf. Initially suggested by Lyndon Johnson and extended by Ronald Reagan, the concept was even codified into US law in 2008.
What this means for Gulf arms purchasers is quite simple. The US will not refuse to sell any platforms to Arab allies that it is selling to Israel, but it will ensure that Israel has the opportunity to buy them first. Israel’s QME is already considered to be responsible for Saudi Arabia turning away from the US to the UK to sign the first in the now-infamous series of Al Yamamah contracts to provide Tornado fighters to the Royal Saudi Air Force in the 1980s. By any measure, Al Yamamah has been huge. During a speaking engagement at the Paris Air Show in 2005, BAE Systems’ then-CEO Michael Turner told guests that the full value of past, present and future contracts could amount to as much as $61bn — and that figure is at today’s exchange rate. It is Britain’s biggest ever export deal.
The QME may also be responsible for delays on a new type of aircraft that is rumoured to have been requested by both Saudi Arabia and the UAE, Lockheed Martin’s F-35 Joint Strike Fighter (JSF). “I know the Saudis are interested in it, but that would definitely be down the line because first and foremost the Israelis would need theirs,” says Darling. “Ultimately, Israel will probably buy up to 75. It’s going to be a very expensive aircraft, and by that point they might give it the green light [to sell the F-35 to the GCC states]. We’re looking at least four to five years, but it has been talked about and I don’t doubt that they [Saudi Arabia] will make a request.”
But of the European nations, it is not just Britain that has been making significant inroads into the Gulf market. France has overtaken its cross-Channel rival and has shifted its main sphere of influence from Iraq to the UAE, where president Nicolas Sarkozy opened the first French military base in a post-independent Arabic country in Abu Dhabi last year. “The French are so embedded in the UAE defence market, it’s going to be very difficult for British defence companies to carve out a particular niche,” says ADS’ Salzmann. “In terms of trying to supply aircraft to the UAE, the French already have that market pretty well sewn up, apart from the occasional Lockheed Martin F-16. It’s very difficult to pry your way in”.
A March 2010 report by the Capmena thinktank suggested that one of the reasons France had found such a natural fit with the Gulf was its image as an ‘alternative’ supplier to the Anglo-Saxon nations, and its knowledge and understanding of the Arab world. Companies like Thales and Dassault have invested heavily in local partnerships, in the civilian as well as military side. “The French government wants to keep its influence in the region and also increase cooperation with countries such as Qatar and Kuwait,” says Gilles de Vivies, an analyst with Paris-based consultancy ADIT. “The GCC market is presented in France’s Livre Blanc [national strategy programme] as being absolutely crucial.”
As the recession continues to bite, however, there are signs that the UK is putting a renewed focus on its defence industry, with new prime minister David Cameron visiting the region during his first visit abroad and the Queen scheduled to come to the Gulf next year. It all points to a bonanza for global OEMs and their resources are pouring into this most volatile of regions as a result. But as other governments take the foot off the pedal of conventional arms spending, is the Gulf on the right track? When the incoming chief of defence staff in the UK cites cyberwarfare as one of the biggest areas of concern for this century, you can be sure that governments around the world are putting a high premium on the issue. General Sir David Richards, who was appointed to his position in mid-July, believes that “attacks are likely to be delivered semi-anonymously through cyberspace” or via the use of guerillas, instead of more conventional weapons. Especially given the progress towards ever-smarter technology, cyber attacks can be directed at critical infrastructure nodes, such as the banking or utilities network. Given the lack of a strategic water reserves in the UAE, an offline desalination plant could result in a city coming to a standstill in less than two days.
So what does that mean for the billions that the Gulf is spending on defence, especially given that much of it seems to be earmarked products that defend against conventional attacks? Some critics believe that the region is buying more hardware than it can even man. But the answer, in effect, lies a short distance over the Arabian Gulf. The fear has always been that in the event of an Israeli/US strike on Iranian nuclear facilities, the GCC would suffer the ‘blowback’ of a response from the Islamic Republic targeting oil terminals or airports, not to mention a potential closure of the Strait of Hormuz. The need for conventional weapons may be dropping elsewhere, but the Gulf nations have never needed more high-tech missile defence, air defence and littoral surface combat ships. It’s simply a case of not wanting to rely on others if the worst should happen.
“Protection of shipping lanes and cargo, as well as ports is definitely something that has become a heightened concern for these countries. They would normally and principally rely on the US Navy to take care of that and they still will, but closer to their shores, that is still a concern,” adds Forecast International’s Darling. “It’s not a very wide sea, and the UAE and Oman are very close on their eastern tips, and the Iranians still control three strategic islands in that area [Abu Musa and the Greater and Lesser Tunbs]. These are areas that are extremely sensitive to the Gulf nations, and protection of their own strategic infrastructure is going to be paramount.”