Saudi manufacturing to see ‘modest’ boost from defense deals

Saudi Arabia’s recent defense deals will make a modest contribution to its economy, but the development of a local military manufacturing sector will face roadblocks like tough competition and the lack of supporting industries, analysts told Argaam.

The Kingdom, one of the world’s biggest military spenders, has been increasing defense expenditure following its ongoing military intervention in Yemen, with a 2017 budget that projects a 6.7 percent increase in defense spending to SAR 191 billion this year.

Under its ambitious Vision 2030 economic reform plan, the world’s top oil exporter aims to localize over 50 percent of military spending by 2030. Currently, only around 2 percent of military procurement is local.

“Saudi Arabia’s spending on defense gives it leverage to bring some manufacturing capabilities to the country,” said Graham Griffiths, analyst at Control Risks. “However, the goals the government has set are incredibly ambitious.”

Developing a mature defense manufacturing sector takes considerable time and investment and requires a whole range of supporting industries and a deep pool of human capital, he said. The Kingdom will also likely struggle to rapidly expand its capabilities beyond areas like maintenance, assembly, and the manufacture of simpler items.

Defense Deals

In May this year, Saudi Arabia announced the establishment of a new national military industries company, Saudi Arabian Military Industries (SAMI) – a wholly government-owned entity that seeks to become one of the world’s top 25 defense companies by 2030. SAMI is expected to help fulfil the local procurement goals outlined under Vision 2030.

The Kingdom inked a series of major military agreements the same month with American firms during US President Donald Trump’s visit. Aerospace giant Boeing said it had signed $50 billion worth of deals, which are expected to support the government’s plan to localize military equipment spending.

In another announcement, Saudi Arabia expressed its interest in acquiring more than $28 billion worth of weapons from Lockheed Martin.

Riyadh-based Taqnia Aeronautics – fully owned by the Public Investment Fund – signed a letter of intent (LOI) with Lockheed Martin to form a joint venture to support the final assembly and completion of an estimated 150 S-70 Black Hawk utility helicopters for the Saudi government. 

The program will potentially create 450 jobs in Saudi Arabia, and support jobs in the US, Alan Chinoda, chief executive and general manager at Lockheed Martin Saudi Arabia, told Argaam.

Despite its substantial investments, the Kingdom faces stiff competition from neighbors in the region like the United Arab Emirates, which moved to consolidate its defense sector in 2015 with the creation of the Emirates Defense Industries Corporation, said Kristian Ulrichsen, fellow for the Middle East at Rice University's Baker Institute.

“The UAE experience illustrates how many of the localization processes start life as offset agreements. The challenge for the Saudis will be to ensure that there is sufficient emphasis on technology transfer and skills development [so] that the offsets can contribute meaningfully to capacity building and job creation,” he added.

Going forward, both Griffiths and Ulrichsen expect Saudi Arabia to ink more major arms deals, given the region’s geopolitical situation and the ongoing war in Yemen.

“There are plenty of areas where the government likely still feels that it needs to make significant investments in upgrading its capabilities,” Griffiths added. “Arms deals are also an important component of maintaining the Kingdom’s relationships with its key partners.”

Saudi weapons purchases can also help keep American factories open, which can be a “useful hedge against any potential volatility arising out of the President's sometimes unpredictable statements,” Ulrichsen noted, in reference to US President Donald Trump.

New Suppliers

Political opposition to Saudi defense deals in countries like the UK may open up opportunities for other suppliers like Russia to step in.  Saudi Arabia signed an arms deal worth $3.5 billion with Russia’s Rostec Corporation earlier this month.

“Russia has already started to make inroads into weapons sales, both in the UAE and in Saudi Arabia, and this trade may well continue,” Ulrichsen said.

“However, there will be issues with interoperability with existing systems that may limit the amount of weapons purchases from Russia,” he added. 

Write to Jerusha Sequeira at jerusha.s@argaamnews.com