by Richard Pettibone, Aerospace & Defense Companies Analyst, Forecast International.
Despite some recent management troubles, Denel remains stable. The company plays a key role in the self-sufficiency of South Africa’s defense industry, and the government will continue to support the firm with work. That said, government work has been declining of late due to tight budgets, forcing Denel to adapt.
Besides heated foreign competition, Denel must deal with low domestic defense spending. The South African military is cash-strapped and is in a state of decline. One strategy that could be used to work around these handicaps is the formation of cooperative programs.
In response, Denel has been diversifying away from its South African dependency as much as possible over the past few years. Now, exports, primarily to the Middle East and Southeast Asia, account for almost 58 percent of the firm’s revenues. To cap off this success, Denel has achieved a triple-A rating from Fitch Ratings in recognition of its improved financial performance, which it has maintained for several years.
The shift is good news for Denel, which for many years had a very singular customer focus. The firm’s original raison d’être was to provide South Africa with the military equipment it needed to defend itself when the country was isolated from the world due its apartheid policies. From attack helicopters to missile boats, Denel kept the country’s armed services stocked with world-class systems. When apartheid was dismantled, the South African defense industry emerged into a world where self-sufficiency was no longer required. As South African military procurement neared a standstill, Denel scrambled to keep its factories working. The result was years of losses, consolidation, and restructuring.
The South African National Defence Force (SANDF) is looking to engage in a new round of procurement activity under the Vision 2020 plan – a strategic blueprint designed to better equip the South African military for an evolving array of peacekeeping, humanitarian assistance, and sovereignty protection missions in the coming years. As was the case with the previous decade’s procurements, this new round will see more cooperation with international suppliers. Future procurements will have stipulations for offsets to enhance the local economy and technology base. Denel, as the main arms-producing entity, will receive the majority of this offset work.
The company’s growth plan also calls for increasing exports to other African markets. Currently, management is investigating how best to leverage its position as the continent’s premier aerospace and defense corporation. One successful strategy has been to promote the firm’s Casspir mine-protected vehicle, which can be used for demining tasks.
A key market for Denel is UAV systems. South Africa was a pioneer in UAV technology and use, but in recent years, its presence in this area has slackened. Now, the country hopes to revive its UAV capabilities, and the Air Force appears to be a willing partner. Denel has two such systems under development – the Bateleur and the Seeker 400, and the Air Force is reportedly interested. However, the service’s plan to acquire only one of these two systems does nothing for development of the industry in the meantime. To succeed, Denel will have to find teammates abroad, no small task in this very competitive market.
As it moves ahead, the firm is looking to diversify. Denel has recently targeted the maritime industry as an area of expansion with the formation of the Denel Integrated Systems & Maritime (DISM) division. In addition, the company will, like many other defense companies in the world, target ancillary markets in the civil security and command & control domains.
Now the bad news. It appears that Denel may have been overzealous in some of its recent expansion efforts. Some of its more recent moves, such as the acquisition of BAE Land Systems South Africa and the formation of Denel Asia, are drawing fire from the South African government.
In the case of the BAE acquisition, questions have arisen over the transaction. At the core of the allegations is the fact that the BAE LSSA transaction was not implemented in accordance with the funding model that was approved, and BAE LSSA’s liquidity was misrepresented, according to reports.
Then, in January 2016, Denel announced it was creating Denel Asia, a joint venture company in Hong Kong, in partnership with VR Laser. This deal was very controversial in South Africa and is on hold. As of March 2017, Denel was seeking a high court ruling to proceed with the venture.
As a result of these issues, CEO Riaz Saloojee was ousted and disciplinary action was initiated against chief financial officer Fikile Mhlontlo and group company secretary Elizabeth Africa.
Overall, the investigations are not expected to impact the company other than bruising its reputation. It is perhaps the current nature of this hyper-competitive industry that deals get cut just a bit too quickly in order to capture market share.
The Defense & Aerospace Companies series focuses on worldwide aerospace and defense prime contractors and subcontractors. Concise reports provide data on individual corporations regarding recent mergers, restructurings, and joint ventures, along with a Strategic Outlook that examines the company’s strengths, weaknesses, and opportunities. Also included in each report are financial and industrial segment data, snapshot coverage of major programs, and recent U.S. Department of Defense contract awards.
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