Oil fuels fledgling defence industry

Ivan Gale

 http://www.thenational.ae/article/20080701/BUSINESS/792148507/0/NEWS

 

  • Last Updated: July 01. 2008 9:53PM UAE / GMT

New venture: The UAE is at the centre of many important defence-related projects including the IDEX Show (above). Weapons development could soon emerge as an important national industry. Reuters

ABU DHABI // Firearms, munitions and laser-guided rockets may soon vie for prominence with oil and petrochemicals among the list of Abu Dhabi exports.

The Government is pushing to develop a home-grown defence industry and is using its oil wealth to finance a host of new companies, eyeing both domestic and international markets.

As Saif Mohammed al Hajeri, the chief executive of the UAE Offset Program Bureau tells it, the UAE began thinking of the possibilities during previous showings at the International Defence Exhibition and Conference (IDEX). The Government uses the Abu Dhabi event to seal major deals, with the last fair in 2007 resulting in Dh1.4bn (US$381 million) in new contracts by the UAE Armed Forces.

Among the billion-dirham deals, Mr Hajeri recalled, something happened within the Government leadership. “IDEX created an awareness of manufacturing this equipment locally,” he said.

Now, with names such as Tawazun, Al Burkan, Caracal, Al Taif and Abu Dhabi Ship Building (ADSB), defence is being added to the number of industries rising from Abu Dhabi’s oil base.

The economy is undergoing seismic shifts as part of the country’s move away from reliance on oil exports. New markets for heavy industry, property development and tourism are being developed as part of its Plan Abu Dhabi 2030, a blueprint for the emirate to diversify its economy and become a “global capital”.

“The UAE has always supported defence companies. Now it’s getting more structured, more logical, more systematic and planned,” said Caio Mussolini, the head of the UAE office of Finmeccanica, a major Italian defence contractor with a long history of working with the UAE Armed Forces.

The Offset Bureau and its subsidiary, the Tawazun Holding Company, had helped to spawn dozens of joint ventures between local companies and defence contractors with the goal of international sales. The model was partly based on the successes of South Africa and Turkey, he said, which boasted robust local defence sectors.

“It’s about diversifying the economy beyond oil or selling land,” said Mr Hajeri.

The defence industry is a giant in the global economy. Northrop Grumman earned $32bn (Dh117bn) in revenues in 2007, Lockheed Martin, $41.9bn, and Raytheon Company, $21.3bn. That is in addition to powerhouses such as Thales, Boeing, EADS, and Finmeccanica which employs more than 60,000 people around the world.

In the beginning, the UAE purchased advanced weaponry and defence systems from these contractors. Over the past decade, it has spent an estimated $15bn on F-16 fighters, tanks and other systems.

But slowly, over time, the relationships spawned from these deals led to partnerships and joint ventures, providing a transfer of knowledge that allowed the UAE to leapfrog lengthy development stages.

Alenia Aermacchi, a subsidiary of Finmeccanica, flew its first military aircraft in 1913, but Mr Mussolini said that the UAE would not have to wait a century to develop aerospace expertise. That said, there are still formidable challenges for the nascent industry. Knowledge transfer is one thing, but building a reputation is a different story. It will take years for Abu Dhabi to make a name for quality and reliability to compete for business in the regional arms market.

One of the first joint ventures was ADSB, formed in 1995 with Newport News, a major US shipbuilder. From its factory in Musaffah, ADSB has grown from focusing on repairs, refits and upgrades to the manufacture of steel, aluminium alloy and advanced composite hulls. Its Musaffah yard is the site of the Baynunah project, where it is producing six 72-metre long corvettes, which are small, manoeuverable, lightly armed warships. The $1bn contract is with the UAE military, but the company says it is in talks with other GCC nations for new tenders.

In 2005, a new state-backed company was incorporated, called Emirates Advanced Investments. Last month, it partnered with Raytheon Company, the American defence contractor, to develop and build laser-guided rockets. The agreement with the world’s fifth-largest defence contractor and the largest producer of guided missiles will shift research and development for new laser-guiding technology to the UAE. The manufacture of 70mm rockets will be sold to the UAE military followed by sales to American armed forces.

More recently, new companies have been launched by the Tawazun Holding Company and Mubadala, an investment arm of the Abu Dhabi Government, an estimated $10bn.

Mubadala made its first investment in defence last year with the creation of Al Taif Technical Services, which focuses on the maintenance, repair and overhaul of military vehicles as well as arms and electronics systems. Launched with an anchor contract from the UAE Armed Forces, worth Dh1bn and spanning 20 years, Al Taif will begin marketing itself to other nations of the GCC next year.

Tawazun has helped to start Al Burkan Munitions Factory, which is building a Dh268m plant at Zayed Military City in Abu Dhabi for the manufacture of aircraft bombs, artillery, naval rounds and small arms ammunition. The plant is expected to begin producing aircraft weaponry next year and ammunition for land and naval forces in 2010.

Tawazun also started Caracal, the Gulf’s first handgun maker, last year. Like many initiatives, it began with a proposal to buy arms from a renowned handgun designer, and quickly developed into discussions to manufacture the products in-country. From factories within the UAE, Caracal expects to produce up to 50,000 nine millimetre handguns for military and police departments in the country, with additional contracts signed with Jordan and Bahrain. Next year, it plans to begin marketing itself to buyers in the US and Europe to target the global market for 2.7 million handguns every year, and in the process challenge pre-eminent brands such as Walther, Glock and Heckler & Koch.

Abu Dhabi’s recent initiatives have earned the acclaim of analysts. “By looking to secure long-term partnerships with international firms, the UAE appears to be committing to building its reputation and genuine domestic capabilities so as to become a regional hub for defence research and development,” said Lauren Gelfand, the Middle East and Africa editor for Jane’s Defence Weekly.

However Ms Gelfand said the transition from an arms buyer to seller would take time before nations entrusted their sensitive homeland defence capabilities to new players.

“It is a long process to build up a reputable defence industry, so it is not going to happen overnight. UAE companies need to build a reputation for quality and cost-effective military products so that they can move beyond catering for the domestic market and into competitively targeting export markets with their domestically produced vehicles and systems.”

The UAE will have its best opportunity yet to state its case at the next IDEX, taking place next February. Among the 900-plus exhibitors will be a few from Abu Dhabi that one would be unwise to count out

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