by Richard Pettibone, Aerospace & Defense Companies Analyst, Forecast International.
Denel is currently a mess.
It appears that the company may have been overzealous in some of its recent expansion efforts. Some of its more recent moves, such as the acquisition of BAE Systems Land Systems South Africa (LSSA) and the formation of Denel Asia, are drawing fire from the South African government.
In the case of the BAE Systems acquisition, questions have arisen over the transaction itself. At the core of the allegations is the fact that the BAE Systems LSSA transaction was not implemented in accordance with the funding model that was approved, and BAE Systems 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. By August 2017, the deal was canceled. By year-end 2017, Denel was having severe liquidity problems, which resulted in employee and supplier payment delays. Finally, adding to the company’s woes were corruption allegations and union strife.
These issues were a marked departure for the firm, which up until recently had achieved good performance and triple-A financial ratings from Fitch. With the damage done, South African Public Enterprise Minister Pravin Gordhan sacked the entire Board of Directors in April 2018 as part of a cleanup effort. The new board is tasked with restoring good governance practices and rebuilding the company’s tarnished reputation.
Exacerbating the problem is the fact that government work has been declining of late due to tight budgets, forcing Denel to adapt. In addition to heated foreign competition, Denel must deal with low domestic defense spending. The South African military is cash-strapped and 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 working to diversify away from its dependence on South Africa as much as possible over the past few years. Now, exports, primarily to the Middle East and Southeast Asia, account for over 60 percent of the firm’s revenues.
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 nation’s 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, Denel’s 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 South African 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 to help the industry’s development in the meantime. To succeed, Denel will have to find teammates abroad – no small task in this highly competitive market.
Denel’s new management team has its work cut out for it. Amidst a changing military and procurement focus, the company must transition to a leaner, more efficient structure to improve its domestic market and its global competitive standing.
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