Doing Defence Business In The Gulf: Five Things You Need To Know - IHS White Paper


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A region traditionally characterised by social and political unrest and by vast oil wealth, the Gulf is one of the world’s most important regional defence markets.

This IHS white paper examines current defence trends and themes, and proposes five key elements that A&D companies need to understand in order to do business effectively in the region.

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Doing Defence Business In The Gulf: Five Things You Need To Know - IHS White Paper

  1. 1. Doing DefenceBusiness In The Gulf:Five Things YouNeed To KnowA region traditionally characterised bysocial and political unrest and by vast oilwealth, the Gulf is one of the world’smost important regional defencemarkets.This IHS white paper examines currentdefence trends and themes, andproposes five key elements that A&Dcompanies need to understand in orderto do business effectively in the region.
  2. 2. Doing Defence Business In The Gulf: Five Things You Need To KnowIHS White Paper Introduction Overall GDP growth should bounce back to 3.6 per cent in 2014, although much will depend on regional geopolitical developments and outlook for The economies of the Gulf states continue to face a challenging growth the global economy. path, with risks remaining elevated as the region searches for stability Amidst improving economic conditions defence budgets in the Middle and recovery in the wake of last year’s Arab Spring. East and North Africa saw growth of 6.1 per cent in 2012, significantly With the Iranian economy reeling under sanctions and a sharp higher than the 0.2 per cent achieved in 2011. Regional spending on contraction in Syria’s GDP, given the ongoing crisis there, IHS projects real defence is now thought to have reached USD132 billion annually, and is GDP growth in the Middle East to slow to 2.8 per cent in 2012, despite a expected to surpass USD150 billion by the end of 2016. 4.6 per cent bounce in the six-member Gulf Cooperation Council (GCC – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates). Current Themes Broadening procurement Gulf states have historically bought friendships and support through materiel acquisition. Historically, the principal suppliers were French, American and British. Warming ties with new suppliers (e.g. India, South Korea and Singapore) plus Eastern powers (Russia, China) point to broadening supplier relations as global power balance shifts. Oil reliance High global demand for hydrocarbons is fuelling military investment, but discretionary capital funding has historically suffered during periods of low prices. Military investment is being used to drive economic reform agendas. Chart: IHS Jane’s Defence Budgets Economic transformation The oil-exporting GCC countries will receive a further lift from rising oil Goals of economic diversification, reduced energy reliance, local production and continued public spending and investment in 2012, but employment and training and reduced foreign-labour reliance are will see softer growth in 2013 as oil output is curbed in accordance with common throughout the Gulf. Military investment via offset benefits is lower prices and weak demand. yoked to wider long-term economic goals. 3 4
  3. 3. Doing Defence Business In The Gulf: Five Things You Need To KnowIHS White Paper Offset reform Defence Spending Drivers and Current Threats Gulf states have demanded offset for more than 20 years. Historically the emphasis was on local defence co-operation with a laissez faire approach Internal unrest: Risk of to compliance. Gains were minimal. extremist activity / social Post-2010 reforms have put emphasis on more structured obligations unrest apparent – Regional threats (Iran / with greater realism and tolerance of indirect commercial benefits in line enhancement of intelligence Iraq): Air defence and land with economic transformation goals. capabilities inevitable systems modernisation / The Arab Spring procurement apparent across Gulf markets – fear The unrest accelerated reform programmes, with emphasis on social of further deterioration of programmes, local employment and investment. Billions of dollars have regional security been aimed at quelling discontent, with the risk that procurement environment driving funding may suffer. spending. US draw-down in Iraq an added factor In addition, the uprisings put the political focus on European arms sales to the region. For example:  Switzerland cancelled laser targeting deal with Qatar  Israeli “Operation Cast Lead” led to UK export license suspensions  Proposed sale of 200 German Leopard 2 MBTs to Saudi Arabia caused pan-political disquiet  Spanish exports to Morocco were reviewed in 2011 following Critical infrastructure concerns of “improper use” security: Investment in critical Maritime Security: Spread  Resignation of Sten Tolgfors following Sweden/Saudi Arabia infrastructure security high, of piracy from Gulf of Aden defence industrial co-operation reports but vulnerabilities remain. threatening trade and Broad area surveillance (e.g.  French contracts with Syria / Yemen frozen driving procurement of UAV systems) lacking maritime surveillance and The Arab Spring was a social media uprising; as such lessons learned are interdiction solutions likely to lead to an emphasis on cyber-security and intelligence capabilities across the region. 5 6
  4. 4. Doing Defence Business In The Gulf: Five Things You Need To KnowIHS White Paper Five Key Defence Business Factors 3: Visibility and the importance of market dynamics Procurement practices in the Gulf are typically opaque, and decision- 1: Security alignment making processes seldom follow formal structures. With this in mind, Major suppliers to Gulf States typically have far reaching government- achieving visibility is essential...but may be challenging. level security commitments in place: Alignment with a well-connected in-country partner is typically advisable,  The UK’s past success in Oman is based on support for the and an understanding of internal market dynamics and the relations of Sultanate against internal uprising in 1970s, and current decision-makers is essential – in this market regular, actionable customer commitments remain strong intelligence is invaluable.  The French position in UAE is underpinned by the 1995 signature 4: Trust through energy and infrastructure of a common security agreement Closer defence procurement relations have frequently been preceded by  Kuwait’s military doctrine is based on an assumption of US closer relations relating to major infrastructure and energy programmes. support From a customer perspective, defence procurement opportunities are Suppliers gain leverage from these commitments, and opportunities are part of a wider business landscape – they do not exist in isolation – and best pursued within this context. this attitude may be exploited. 5: Existing in-country presence / partnership 2: Political alignment Partnerships and joint ventures are encouraged, and are a prerequisite of Materiel procurement is typically used as a means of cementing relations success in the Gulf. and achieving broader aims. Political alignment is therefore vital for successful business. The establishment of local partnerships ahead of contracts should be considered a key part of a successful procurement process.  Step-change defence agreements have historically been preceded by favourable government-to-government developments in areas ranging from border-demarcation to bilateral trade. Summary  Gulf States have taken a dim view of negative attention from The Gulf states represent a significant opportunity for A&D supplying countries. UK – Saudi Arabian defence trade was briefly businesses, and despite challenging conditions the region remains a threatened by a subsequently terminated UK Serious Fraud Office growth market – particularly the GCC member states. (SFO) investigation Successful defence procurement in the Gulf hinges on effective The political element of an A&D opportunity should not be planning and partnership, with a need for high-level underestimated. relationships that stretch beyond the contracting authorities. 7 8
  5. 5. Doing Defence Business In The Gulf: Five Things You Need To KnowIHS White Paper About IHS About IHS Defence & Security IHS (NYSE: IHS) is a leading source of information and insight in pivotal With over 100 years of history as Jane’s, IHS is the most trusted and areas that shape today’s business landscape: energy, economics, respected public source of defence and security information in the world. geopolitical risk, sustainability and supply chain management. With a reputation built on products such as IHS Jane’s Fighting Ships, IHS Businesses and governments around the globe rely on the comprehensive Jane’s All the World’s Aircraft and IHS Jane’s Defence Weekly, IHS delivers content, expert independent analysis and flexible delivery methods of IHS comprehensive, credible and reliable news, insight and analysis across all to make high-impact decisions and develop strategies with speed and key defence and security subject areas in support of critical processes. confidence. IHS defence industry and market analysis and forecasting products IHS has been in business since 1959 and became a publicly traded represent an invaluable open-source news, information and intelligence company on the New York Stock Exchange in 2005. Headquartered in asset for businesses that want to understand how to expand into the Englewood, Colorado, USA, IHS employs more than 6,000 people in more world’s new and emerging defence markets. than 31 countries around the world. Industry and market news and analysis  IHS Jane’s Defence Industry & Markets Intelligence Centre Procurement programme intelligence  IHS Jane’s Defence Procurement Intelligence Centre Market forecasting  IHS Jane’s DS Forecast Budget forecasting  IHS Jane’s Defence Budgets  IHS Jane’s Defence Sector Budgets 9 10