Strength in arms and industry across the GCC

As military budgets grow in the Gulf and shrink elsewhere, the region is in a strong position to develop local defence and end reliance on foreign vendors.

GCC governments are in a strong position to develop the regional defence industry, write Hugo Trepant, Bob Mark and Andrew Suddards. Stephen Lock / The National

The recent takeover by Tawazun of Al Jaber Land Systems and Tawazun's alliance with Saab demonstrate the growing importance of the GCC's defence industry base.

But such corporate consolidations and alliances are not yet the norm. They are necessary but not sufficient elements in the development of the regional defence industry. The next step must be to further reduce the disconnect between local industrial capabilities and the complex requirements of the armed forces.

To close this gap, governments will need strategies that foster greater coherence between defence and industry, through policy and the careful selection of partners backed by joint ventures.

The challenge is considerable. GCC militaries routinely allocate a large portion of their defence spending to foreign contractors, often because local industry cannot meet their needs.

Over time, this becomes self-reinforcing. Local providers, deprived of the opportunity to fulfil important contracts, do not improve sufficiently to replace foreign suppliers.

Maintenance and repair is a good example. Most GCC armed forces can contract local companies for minor jobs, but these firms often lack the technical expertise to maintain advanced systems. Worse, some have a poor reputation for other service aspects, such as timeliness. The result is that much of the maintenance and repair business for complex, high-value systems - such as missiles, radar circuit boards, avionics, and engine components - leaves the region. This lack of local competition is good news for the original equipment manufacturers. In addition to fiercely protecting their intellectual capital, they generate significant revenue from repairing and refurbishing expensive spare parts.

The resulting dependence on foreign sources also creates problems for the armed forces.

Keeping platforms and systems operationally available can be a struggle because of the long lead times for replacement parts from foreign suppliers, and the steep prices that foreign companies charge when those parts become available. Armed forces are also vulnerable to a reduction in their capabilities during crises, when supply chains can be disrupted or blocked for political reasons.

Creating greater coherence between industry and defence can alleviate many of these problems. Fostering coherence requires an understanding of industrial strategies in key sectors, effective governance, aligned research and development efforts and incentives for industry to improve its performance. Coherence will lead to a closer match between local industrial capabilities and armed forces' needs, resulting in the creation and retention of valuable intellectual property, knowledge and wealth in the GCC, while making GCC militaries less reliant on overseas suppliers.

Joint ventures between foreign providers and local industry partners are an important mechanism for encouraging coherence. Notable recent examples include Ammroc, Mubadala's joint venture with Lockheed Martin and Sikorsky to bring deeper military aircraft support capabilities to the UAE. Such joint projects are an intermediate step in the development of the defence sector because they allow local companies to accumulate technical expertise with the help of foreign partners.

The difficulty with joint ventures, though, is that they are not always appealing to large suppliers. Many foreign contractors may prefer to service GCC customers from their home base rather than forge alliances with local industry. From their perspective, GCC markets can suffer from fragmented customer decision rights, making joint ventures uneconomic.

GCC governments can make joint ventures more appealing by aggregating demand.

This allows joint ventures to be created that move away from delivery of a single contract to those based on strategic partnering in a defined capability area. In military terms this means establishing clear materiel groupings - such as marine, ordnance, medical, and command and control - even in cases where the platforms and systems may be used by different branches of the armed forces. In addition, they can include contractual mechanisms to give foreign suppliers the incentive to improve the capabilities of their local partners.

Joint ventures also require the careful choice of companies on both the local and international side. To avoid potential political issues in the selection process, policymakers will need clear governance arrangements. They will also need to ensure that the firms involved in the joint venture will address the needs of the various branches and departments of the armed forces and will meet the goals of their defence industry strategy.

With military budgets being cut in industrialised countries, and the region spending large sums on defence, GCC governments are in a strong position to develop the regional defence industry. They should capitalise on the momentum of recent deals to tie the growth of their defence industries to the increasingly sophisticated needs of their armed forces.

The authors Hugo Trepant, Bob Mark and Andrew Suddards are partners and a senior associate, respectively, at Booz & Co