SALVO, Armscor's Corporate Journal
January 1999

During August last year Armscor created a post of Chief Executive Officer and appointed Mr Llew Swan to the position. Salvo spoke to Mr Swan about his function and his plans for Armscor.

Could you sketch for us your position and function in Armscor and in the defence family?

As Chief Executive Officer, I am responsible for the day-to-day running of Armscor and for such matters as strategic planning. You will know that for the past three years or so Armscor did not have a CEO. It had an Executive Chairman, who had to fulfil the corporate governance function and also take care of the day-to-day running of the organisation. Towards the middle of last year it was decided to go back to the previous system of a non-executive Chairman and a Chief Executive Officer. The CEO's function is to ensure that the organisation renders a cost-effective service to the SA National Defence Force while functioning inside the boundaries set by the Armscor Act, the Defence White Paper, and the Defence Review.

As CEO of Armscor I report to the Board of Directors through the non-executive Chairman. Numerous interfaces with the SANDF and Defence Secretariat take place at various levels.

As CEO of Armscor, could you give us your vision for Armscor and the defence industry? Will there be a role for them now that South Africa is beginning to buy its military equipment on the international market?

Armscor's function is defined by statute, so there really is not much room for creativity and diversity. The organisation's primary function is to provide a cost-effective service to the SANDF for the execution of its capital acquisition programmes, together with the logistic support that is required. Its other primary function is to dispose of all the SANDF's surplus military equipment. It also performs certain secondary functions in that it has certain strategic industries such as IMT, Gennan, Gerotek, and Protechnik to administer.

As regards the defence industry, that is a different matter altogether. The industry is undergoing tremendous change. There are no sanctions any more and it is no longer operating in a closed economy, because Armscor now procures not only from the local industry but from the world at large. South Africa requires the defence industry to provide not only products but also the logistic support required to sustain the defence force. The industry is no longer in the privileged position of having a captive customer. This means that the industry must become more competitive and supply the SANDF with solutions that are internationally cost-effective. By this I do not mean to imply that the industry was not competitive in the past. Many of their products were exported, and you cannot export if you are not a cost-effective supplier. So there definitely is a role for our defence industry - not only locally, but internationally. In certain product lines we are world leaders, e.g. artillery systems, ammunition, certain electronic warfare systems, communications, remotely-piloted vehicles, etc. these products are saleable both here and abroad.

In this year's budget, the defence allocation has not been cut - for the first time in years. What would the reason for this be, and do you think the defence family can look forward to a continuation of this trend?

Over the last number of years the defence budget has been drastically reduced, and I think it has now reached a level where it simply cannot be cut any more if we are to provide an effective service to the country. It was stated in the Defence Review that South Africa needed a technologically advanced defence force, and this objective can only be achieved on a realistic budget.

As regards the possible continuation of this trend, i.e. a regular annual increase in the defence budget, I think that we have probably found our niche at about 1,5 - 1,6% of the Gross Domestic Product. I do not believe that this percentage will decline, unless the economy grows substantially. If the economy does grow, the percentage of GDP may decline, but I cannot see the defence allocation declining in actual rands. I am sure we are going to see a sustainable defence budget for some time to come. As regards utilisation of the defence budget, the long-term vision is that 40% will be allocated to personnel, 30% to operating costs, and 30% to capital equipment. Currently only 8% of the defence budget is spent on equipment, which means that the defence industry can actually look forward to an increase in spending on equipment. This should take place when the rationalisation and transformation of the SANDF has been completed - probably in about two year's time.

How do you see the structure of Armscor and the size of its staff over the next few years?

Armscor is financed from the defence budget, and it has to function within the confines of the resources that are allocated to it. There has been no increase in the amount allocated to Armscor for the next year, and this will place us under pressure. I do not see Armscor's staff increasing over the next few years, unless the workload somehow increases. This is unlikely, as we are busy negotiating the defence "package deals" and the staff we have seem adequate for this task as well as the other day-to-day functions. We have actually placed a moratorium on new appointments for the next year because of the budget restrictions.

Is transformation in Armscor going according to plan?

Our transformation plan is still active, and I believe that it is going according to schedule. It is something that has to be driven - it will not happen naturally. There's a lot of emphasis on transformation at Management Board meetings and a lot of input from members of the board, and I am confident that over the next few years Armscor is going to be transformed into an organisation quite different from what it used to be. It will be much more representative of the demographics of the country. This is not to say that the organisation will become 80% Black over the short term. Such a process takes time, but it is being done in a logical manner. What is more, transformation is going to take place at all levels - not just at the senior levels. Transformation to me is not just affirmative action. It is transforming the whole organisation and the way it runs. The way Armscor functioned in relation to the old SA Defence Force is not the way it will have to function in relation to the SA National Defence Force. They are two totally different organisations. So transformation means that Armscor will have to become service orientated. We are actually in the service business, providing a service to the SA National Defence Force as a customer. We also provide a service to the South African industry to ensure their survivability and that the products they supply to the SANDF are what is required.

So transformation is a transformation in the way you deal with your customer, the way you deal with your people, and the way you run the organisation. Armscor has to be transformed into an organisation that can function effectively for the next number of years in South Africa.

The defence industry's swords-to-ploughshares efforts have not received much publicity lately. Is Armscor still assisting the industry with this - e.g. in the form of marketing assistance?

Such assistance is not really Armscor's function. If the industry wants to convert to civilian manufacture, they are free to do it. But Armscor's function is in the military area, acquiring equipment for the SANDF.

Could you tell us something about yourself?

Well, if I must... I am a chartered accountant by training. I qualified in Natal in 1975, and did my articles in Pietermaritzburg. In 1976 I joined the then Barlows Communications - later to become Barcom and then Reunert Defence Industries or RDI. This was my first acquaintance with military manufacturing. I was a financial accountant at first, but over the next couple of years I held various financial positions in both Barlows and Reunert's Defence Companies up until 1986. Thereafter I held the positions of Commercial Marketing Director of Reutech, Reunert's combined defence and telecommunications group; MD of Reutech's mechanical companies - now Reumech - until taking over as MD of the now recomposed Reutech group - i.e. Reunert's Military Electronics group. In 1996 I was appointed Chairman of Reunert's Defence interests - Reutech and Reumech. I left Reunert in 1998 to pursue my own interests until being approached to join Armscor, which I did in August 1998.

As regards hobbies, I am an enthusiastic runner and have been competing in the Comrades Marathon for a number of years. I also play golf and enjoy fishing. My wife Lin and I have been married for 26 years and have two daughters, Sarah and Kate.

Is there any other matter you would like to comment on?

Yes. One thing that I would like to make clear is that I want to run Arnscor on business principles. People must be measured on performance. They must become service orientated, because, as said, that is the sector of business that we are in. We also need to look at changing the attitudes of the people within the organisation - not only towards our own people but also towards our customers and suppliers. The way we have to operate now is not the same as the way we operated during the sanctions years. A lot of people wrestle with this in their minds because they do not quite understand the situation and are not comfortable with change. But once they embrace change, they will find it is actually not that bad - we still have some way to go. Armscor still has a reputation as an organisation dominated by Whites, and I would like to see that tag changed in the not-too-distant future. Good progress has been made in this regard in that 60% of the Armscor Board are Black (both male and female) and the current management board is nearly 45% Black. It will be difficult, but I think with the quality of some of the people that are now working in the organisation, we can do it. We will need a lot more education of the people with regard to the changes that are taking place, but in current times change is quite critical for Armscor - it is just as critical for the industry. I have said this many times before and I was not always popular for saying it, but I do not believe that there has been much transformation in the defence industry. It is easy to change senior management and put a couple of Black faces on the Board, but the change is really needed in the engine room. That's the heart of the operation. Some companies have of course done it. There's a lot of interest in the industry from the previously disadvantaged section of the community. We have had substantial investments from Kunene Brothers, for instance, and a lot of interest from various Black groupings within the business sphere. That's one thing, to change it from an equity point of view, but it needs to change at the operating end as well.

Armscor does give a monetary preference of up to 10% to previously disadvantaged organisations, plus an extra 2% for female-run businesses. That is an incentive to encourage the industry to change, but we have seen very little advantage taken of it. When the tenders come in, the major industries take scant advantage of the preferences offered. To me it is disappointing.

I think the industry's association, AMD, should be used a lot more. It played a tremendous role in the initial stages of input into the Defence White Paper and the Review, but I am not sure that the industry actually uses AMD to the best advantage.

With acknowledgements to Minah Sindane and SALVO, Armscor's Corporate Journal.