Revenue must generate research and development, writes Andrew Gillingham

The aerospace and defence industry is strategic, one that sustains a country's ability to provide security for a nation's citizens.

Furthermore, a country's ability to provide a secure environment can affect confidence within the country and is one of the building blocks of sustainable economic activity.

Stuart McIntyre, executive director SA for BAE Systems, says the technologies used by the industry are very advanced and developing these technologies is a very expensive process.

"Not many countries can sustain a defence-industrial establishment that can cover all the areas of defence capability. Therefore, they buy those products and services they cannot source locally," McIntyre says.

He says SA differs from the usual pattern and this country has a comparatively large and diverse defence industry.

McIntyre says SA has a unique opportunity and the government is keen on development within the sector.

However, sustaining SA's defence establishment would require a much larger economy than the SA economy.

Therefore, the viability of SA's defence industry depends on this country's ability to access and sell its products in the international community to generate the turnover required to sustain the industry.

In addition, revenue must be sufficient to generate further research and development.

"Being an exporter is critical for the survival of the SA industry," McIntyre says.

At the same time, he says the role of the local customer, namely the SA government, is critical for ensuring the future health of the industry.

Local defence procurement is running at around 1,8% of SA's gross domestic product (GDP), compared with a budget that peaked in excess of 14% of GDP during the apartheid era. Therefore the present level of SA expenditure is not sufficient to sustain the existing SA defence industry.

However, most export customers will want to see if the seller's government is using the equipment, and local sales provide a foundation for developing new products.

"A well-established trend is that new technologies are being developed by countries in partnership.

"A good example of this approach is the Typhoon programme, in which the UK, Germany, Spain and Italy are funding the development of the aircraft, sharing costs and production."

He says SA must look towards this type of collaboration at both a national and industrial level to sustain its defence industry.

Christo Weder, MD of Aerospace Monitoring and Systems, says internationally trading conditions in the aerospace and defence industry are tough and the growth rate is low.

"Established product suppliers are struggling and they are trying to diversify and obtain new business.

"There is a lot of consolidation taking place as companies seek to specialise and optimise their positions in the industry.

"SA is unique in that it has very strong basic technology.

"Until the early 1990s local manufacturers were focused exclusively on SA as its only customer. This gave us a very practical orientation and an innovative approach that is now being coupled with First World processes," Weder says.

Paul Gerber, group manager business co-ordination at Grintek, says prior to the defence procurement packages the local aerospace and defence industry was dying.

"The SA defence budget was subject to continual budget cuts and international sanctions prevented the development of export sales.

"To survive, defence companies had to diversify or get out of the defence business," Gerber says.

Following the arms deal, SA defence companies started to benefit in terms of generating business from international original equipment manufacturers.

"This gave local companies visibility. Many of the overseas players were extremely surprised to see the technology and expertise in this country.

"The arms deal provided a catalyst for joint ventures with international companies.

"Saab, for example, currently has a 49% stake in Grintek Avitronics, and this has expanded to include 49% of Grintek Communication Systems' business," says Gerber.

He says the relationship has allowed the company to gain access to international markets.

For example, Grintek won the Swiss contract for a helicopter electronic self-defence system, despite fierce competition.

"Our product was superior, but without Saab we would not have won the deal. The Swiss government decided to buy European as they were worried about long-term service and support," Gerber says.

With acknowledgement to Andrew Gillingham and Business Day.