ARMAMENTS CORPORATION OF SOUTH AFRICA [ARMSOR]

DEFENCE INDUSTRIAL PARTICIPATION (DIP)

REPORT ON THE PERFORMANCE OF THE FOREIGN SUPPLIERS’ DIP OBLIGATION ON THE STRATEGIC DEFENCE PACKAGES (SDPS

31 March 2005

 

 

  1. EXECUTIVE SUMMARY:
  2. The South African Industrial Participation (IP) programme is comprised of two elements, namely the National Industrial Participation (NIP) programme and the Defence Industrial Participation (DIP) programme. While the NIP programme focuses on non-defence initiatives and is managed by the dti, the DIP programme focuses its initiatives specifically on the defence-related industry in South Africa and is managed by Armscor on behalf of the Department of Defence.

    The DIP programme applies to all defence purchases with an imported content exceeding USD2 million and attracts an obligation of at least 50%.

    The NIP programme applies to defence purchases too, therefore defence purchases with an imported content exceeding USD10 million attract both a DIP obligation of 50% and a NIP obligation of 30%, thus a total IP obligation of 80%.

    For the Strategic Defence Packages (SDPs), an IP obligation of 100% was prescribed, with the split between DIP and NIP being negotiable. The foreign obligors offered far in excess of 300%, mainly due to the extremely competitive nature of the SDPs. The NIP and DIP on the SDPs came into effect in April 2000 and amounts to approximately USD16 179 million. The DIP portion, expressed as a per centage of the total IP obligation, is approximately 15%, which amounts to approximately USD2 417 million.

    With the exception of BAE/SAAB, which has 11 years, the other foreign obligors all have 7 years to discharge their obligations.

    At the financial year-end of 31 March 2005, an overall DIP performance of USD1 230 million was achieved against a planned target of USD1 213 million (101% performance against plan). This already represents an achievement of more than 51% in relation to the total DIP obligation.

    Included in the SDP obligations are approximately USD41 million dedicated towards activities with BEE companies. DIP credits to the value of USD3,2 million have been awarded for BEE activities up to 31 March 2005. This activity is monitored closely to ensure the fulfilment of this obligation within the discharge period.

    To gain an overview of how the DIP programme has extended a lifeline to the SA defence industry, the other DIP obligations managed by Armscor, including the pro-active agreements entered into by foreign Original Equipment Manufacturers (OEMs) in anticipation of future procurement programmes, must also be taken into account.

    Although the SDP DIP obligations may currently be the highest, it only represents 73% of the total DIP obligations managed by Armscor. The SDPs further contribute 59% of the total DIP credits approved since the inception of the DIP programme in 1988, while DIP credits approved under the various other smaller programmes combined make up the difference of 41%.

    This report, though, will mainly focus on the performance under the SDPs.

     

  3. THE DEFENCE INDUSTRIAL PARTICIPATION (DIP) PROGRAMME:

The key objective of the DIP Programme is to contribute towards the sustainability of the South African defence industry. In many respects this objective has been met. Despite an overall decline in aerospace/defence markets since 2000, much of the South African defence industry has benefited from work generated by the DIP programme. Some companies have even experienced growth as a result of the relationships established with the main contractors of the SDPs.

Major achievements resulted from the Government’s IP Programme and specifically from the SDP DIP Programme, despite the many challenges faced.

In a relatively short period of time, many SA companies have become sole suppliers to the foreign OEMs of parts, components and sub-systems. Some companies have even become fully entrenched in the supply chains of international organisations such as Boeing and Airbus.

Investments were and are still being made in SA companies to expand the capacity to accommodate the increase in demand for their products and services. The obvious result is higher foreign currency earnings for SA. In addition, many jobs are retained and many new jobs created. Through these expansion programmes, an increasing number of Black Economic Empowerment (BEE) companies are being involved, either as subcontractors to bigger SA companies, or directly to the Foreign OEMs. Through specific growth and improvement programmes these companies are able to meet the stringent certification standards required for competing in the international military and aerospace markets.

Many local companies experience the advantages of partnering large international companies and can now benefit from exposure to international markets. Joint venture companies established under the DIP Programme underline the confidence of the foreign obligors in the SA Defence industry.

Further substantiation of the benefits of DIP is the fact that markets in areas such as the USA, Europe and Scandinavia, which were historically difficult to enter, are opening up to SA defence companies.

Through technology transfer activities, many companies acquired new strategic capabilities and existing capabilities are retained and enhanced. Without this technology base, the SA defence industry would not be able to support and maintain the SANDF’s strategic assets and these services would have to be sourced from abroad at great expense to the State.

Many companies have on various occasions, both formally and informally, expressed their appreciation of the DIP Programme and even the wider media have reported that many of these companies rely on the DIP Programme for their survival and sustainable future growth.

Not only does the DIP Programme provide economic benefit to individual companies through engagement of foreign clients, but it also ensures a level of competence, capacity and expertise to the benefit of the most important local client, the SANDF.

One of the major achievements of the DIP programme is the fact that companies like Denel (Pty) Ltd, Grintek, AMS and Aerosud have in many instances become the sole suppliers for parts of inter alia the Hawk and Gripen fixed-wing aircraft and the Agusta helicopter.

The DIP programme has also resulted in the local industry being drawn into the international circle of missile technology countries, which does not only save the Government and the Department of Defence funds, but also has the potential to earn the country some valuable foreign currency. The industry’s technology base is also not only being sustained but enlarged through their interaction with other countries.

The DIP division also acknowledges that not all the attempts of the foreign obligors to engage the SA defence industry were successful, but the many examples of contracts successfully concluded and long-term relationships established that will last beyond the specified obligation periods, by far outweigh the failures.

It can rightly be said that, as shown in this report, the DIP policy as adopted by the South African Government and as applied by Armscor has assisted growth in the South African economy through exports, investments, transfer of technologies and other activities. Jobs are maintained and created to provide a better standard of living and to counter unemployment. Although future procurement programmes to be launched, will not have the same magnitude in value as the SDPs, new DIP obligations will continue to enhance growth in the South African industry to benefit the economy at large.

3. SDP PERFORMANCE REVIEW:

Performance against the DIP obligations is measured in terms of contractually agreed upon six-monthly milestones. DIP review meetings are held with the foreign obligors, during which their performance is carefully assessed. Performances are measured against specific milestone intervals to enable close monitoring against agreed targets. The obligation value is the total value of the obligor’s commitment that must be achieved over the full period, while the milestones are the amounts that must be achieved at set times as per agreed schedules. All activities and proceedings during the meetings are recorded to ensure that amendments are implemented and corrective action is taken in respect of any potential problems identified.

The tenth bi-annual series of reviews was completed during April to June 2005. The next series of reviews is scheduled to start in October 2005. In addition to these formal contractually agreed upon meetings, regular project visits are paid to companies - national and international - to monitor the progress made on the DIP projects.

It is important to note that Armscor is responsible for the management of the DIP Programme and as such monitors the placement of contracts between the foreign obligors/OEMs and the South African defence-related industry. The DIP Division is not a party to the negotiations of these contracts - documentary proof just needs to be supplied to Armscor upon completion thereof, which forms the basis for awarding DIP credits to the foreign obligor for the local added value of these contracts.

It is important to note that the DIP credits only represent the local added value of the contracts placed on the defence industry, which is recorded on the DIP system, and not the full value of the contract placed on the local companies.

 

On 31 March 2005, the cumulative progress of the six projects was as follows:

Project

Total obligation

(USD m)

Actual performance (USD m)

Performance vs Obligations

(USD m)

Planned performance (USD m)

Actual vs planned

(USD m)

Corvettes

471

255

54%

261

98%

Submarines

179

98

54%

113

87%

LUH

191

114

59%

151

75%

Hawk

680

355

52%

377

94%

Gripen

808

393

49%

298

132%

Maritime Helicopters

88

15

17%

13

117%

TOTAL

2 417

1 230

51%

1 213

101%

 

 

The USD1 230 million DIP credits awarded to date consist of the following:

Project

Local Sales & Exports

Technology Transfer

Investments

Total

Corvettes

199

55

1

255

Submarines

92

5

0

97

LUH

57

52

5

114

Hawk

307

47

1

355

Gripen

149

222

23

394

Maritime Helicopter

15

0

0

15

Total

819

381

30

1 230

 

Approximately 60 South African defence-related companies are involved and at least 5,67 million man hours have been contracted. Industry further confirmed the retention and/or creation of at least 5 000 jobs.


3.1. Examples of DIP activities and issues to note:

      1. Corvettes
      2. MTU South Africa:

        [PMG note: graphic(s) not included, please email info@pmg.og.za]

        MTU South Africa was contracted to assemble the main diesel engines and the diesel generator sets for the Patrol Corvettes. The skills, equipment and technology required for this activity were transferred from Germany and will undoubtedly contribute towards MTU’s long-term sustainability.

        Final assembly at MTU SA – Corvette 1163 main engine

        [PMG note: graphic(s) not included, please email info@pmg.og.za]

        Booyco Engineering:

        The installation of air conditioners and refrigeration equipment in the Corvettes was awarded to Booyco, which also benefited from valuable technology transfer to the company.

        MOH – 9 Armour Ceramics:

        Although not significant in value compared to some other contracts, MOH-9 received valuable international exposure through its work for the German Frigate Consortium which will contribute to its long-term sustainability.

        Alvis Gear Ratio:

        The work includes providing REMAT type automatic vehicle transmissions for armoured vehicles.

        Denel:

        Denel is involved through a number of its divisions. The work includes the supply of surface-to-air and surface-to-surface missile systems by Denel Aerospace systems and the manufacture of the 35mm dual purpose-gun by LIW for the SA Patrol Corvettes, as well as the provision of gas turbines by Turbomeca Africa and ordnance by Naschem to international clients.

        Grintek:

        The Grintek Group is involved through Grintek Communication Systems (GCS) and Grintek Avitronics. GCS is responsible for the design, manufacture and supply of the external communication subsystem and associated logistic support, while Avitronics is responsible for delivering the electronic warfare system for integration into the Patrol Corvettes. This is also an example of local technology being utilised to support the SANDF. Through the involvement of the OEMs, foreign markets opened up for these companies, which have led to the successful export of their capabilities and equipment.

        Reutech Radar Systems:

        Business includes the supply of the STAR tracking, surveillance and target acquisition system.

        African Defence Systems:

        ADS is involved in the supply of the Combat suite management systems and focuses mainly on providing programme and production management services, system integration and the supply of command and control, navigation and anti-submarine equipment. Through investment by the foreign OEM, Thales Naval France, the company has grown into an internationally competitive and profitable organisation.

         

         

         

        Command and control systems for Corvettes by ADS

        [PMG note: graphic(s) not included, please email info@pmg.og.za]

         

         

        Siemens SA:

        The company is responsible for providing the Electrical Plant Systems and Integrated Programme Management System for the SA Corvettes.

        Potential risk:

        A potential risk under the Corvette programme is the pending non-performance of MBDA Missile Systems, which, as a sub-contractor to Thales Naval France (TNF), is obliged to deliver a substantial portion of the outstanding DIP obligation. Although the milestones for this activity have been given as September 2006 and March 2007, it is already clear that they will not be met. Armscor is currently considering a recovery plan by TNF, which will certainly require an extension of the obligation period to maximise the benefit to South Africa.

      3. Submarines
      4. [PMG note: graphic(s) not included, please email info@pmg.og.za]

         

        Grintek Avitronics:

        Components of the optronic mast were manufactured locally, as was the electronic warfare system of the submarines. This system has also been successfully exported to other customers. Avitronics’ performance under this contract has resulted in a relationship with the OEM, which has evolved into a partnership for supply to other international clients.

         

        Siemens South Africa:

        Siemens SA has delivered the main electrical switchboards for the SA Submarines to the satisfaction of the OEM.

        Denel Optronics (Previously Eloptro and Cumulus):

        Denel Optronics (Eloptro) is a prime example of South Africa’s capabilities in a high-technology environment. It designed and manufactured high-precision periscope systems for the SA submarines, in partnership with Zeo Zeiss. Optronics responded well to the challenges provided under this project. Valuable transfer of technology enabled Optronics to export repaired periscopes and to participate in the business of Zeo Zeiss worldwide.

        Having been introduced by the German Submarine Consortium (GSC), Denel Optronics (Cumulus) is now involved with a US based company, FLIR Systems, in the supply of innovative infrared equipment worldwide.

        Denel Overberg Test Range (OTR):

        Through the involvement of the GSC, OTR was contracted to perform flight tests for an international client. The successful conclusion of these tests has opened doors for OTR in the international market, which will probably result in further business.

         

      5. Maritime Helicopters

[PMG note: graphic(s) not included, please email info@pmg.og.za]

 

 

 

 

 

 

 

 

Aerosud:

Aerosud is contracted to deliver engineering services for the supply of the infrared suppression system and the armoured crew seat for the Lynx helicopter delivered to an international customer. Through this co-operation with Westland Helicopters (WHL), Aerosud has become the preferred supplier for this equipment and further business is anticipated.

Avitronics:

The relationship between Avitronics and WHL has resulted in the export of warfare systems, threat approach warning systems and countermeasure systems to an international client. Further business is anticipated and some follow-up work and maintenance has already been contracted.

Denel Optronics has been contracted to provide the Electro Optical Sight Systems for the SA helicopters and the OEM, WHL, will promote the sale of the product to its other foreign clients.

Other Opportunities:

New initiatives by WHL involve financial support to Canvass & Tent (tent and shelter manufacturers) and Scavenger (webbing and strap manufacturers) to acquire new capital equipment to increase their quality and capacity. This is non-core business for the OEM and demonstrates the wide reach of its involvement in SA.

 

3.1.4 Light Utility Helicopters

[PMG note: graphic(s) not included, please email info@pmg.og.za]

Denel Aviation:

Subcontracted to manufacture parts of the A109 SAAF helicopter starting from the 6th helicopter. Technology transfer to enable complete manufacture of the helicopters in South Africa has been completed. With this technology available at Denel Aviation, life support for the total system to the SAAF will be ensured.

Turbomeca Africa:

Repair and overhaul of Makila 1K2 engines under licence. Enabling technologies have also been transferred.

AMS:

This company is contracted for the development and manufacture of the vehicle management module. Enabling technologies have also been transferred.

Other Activities:

Further examples of activities under this programme are the sale of armoured vehicles to the Italian government by BAE Systems Land Systems OMC and the sale of electronic equipment to the UAE government by Grintek Avitronics.

 

3.1.5 Hawk

[PMG note: graphic(s) not included, please email info@pmg.og.za]

 

The assistance of BAE Systems has led to a South African company winning an export order for Bahrain and additional orders from the Royal Air Force (UK), India and Australia.

A wider range of defence-related companies is in the process of being certified to aeronautical standards by BAE Systems, which will benefit the country in the future. As a result of this certification, companies that were not initially identified as possible beneficiaries under the DIP programme, have already received major orders which are currently under review for DIP credits.

A further benefit derived from the DIP programme is that a company like Aerosud, which was initially not a beneficiary under the DIP programme, is today one of the main beneficiaries under the DIP programme and has become fully entrenched in the Airbus and Boeing supply chains. The company had to expand to meet this increase in demand, and further expansion is in the pipeline, which does not only earn more foreign currency for the country, but is also creating additional jobs at Aerosud, which was not initially foreseen.

Many of the RSA companies (for instance Grintek Avitronics, AMS and Aerosud) which have been recipients of work packages under the DIP programme to the SDPs have gone public, on TV, radio and in the printed press, to express their view, that if it were not for the DIP programme, they would not have survived or would not have been able to expand or execute the work that came their way from the SANDF or the local market.

A previously non-defence company, which manufactures tankers for various applications, has been identified by a foreign OEM, after consultation with an obligor to the SDPs, and is now on the verge of being contracted to replace current tankers for a European defence force.

Notwithstanding the fact that the local company chosen by the German Frigate Consortium (GFC) failed to supply acceptable electric cables for our own corvettes, the British government through BAE Systems has identified another local company that can deliver electrical cables for marine use. This company, under the technical supervision of BAE Systems, has already received an order to supply cables for the new British Type 45 Frigate.

Denel Aviation:

Contracted for the final assembly, equipping and testing of the Hawk.

 

Manufacture of Hawk tail plane by Denel Aviation for the South African Air Force

[PMG note: graphic(s) not included, please email info@pmg.og.za]

 

Although various new technologies have been implemented with the assistance of BAE Systems, which should result in a leaner and meaner manufacturing process that will help Denel Aviation to compete on the world market with more confidence, it appears as though the confidence of BAE Systems in Denel Aviation’s capability to absorb and utilise these technologies in the short term, is not very high. In the long term these technologies will have a major impact on Denel however, which can lead to Denel Aviation again becoming a centre of excellence.

 

3.1.6 Gripen

[PMG note: graphic(s) not included, please email info@pmg.og.za]

Various Technology Transfer activities to the local defence-related industry took place during this financial year, which will enable these companies to become part of the SAAB supply chain – in some instances, the sole supplier, especially to Denel (Pty) Ltd.

Through the efforts of SAAB, one of the beneficiaries under the DIP programme, Avitronics, became the sole supplier of highly sophisticated electronic equipment to a European country.

Major work packages have been placed on the South African defence industry for the supply of electronic equipment.

The export market for local designed armoured vehicles now includes the USA, Europe and Scandinavia where orders have already been received that will be earning South Africa millions of USD in foreign currency. Further orders are already imminent from the USA government.

To ensure that the latest skills and technology for the new generation of fighter aircraft are available in the RSA, SAAB embarked on a skills and technology transfer programme to the RSA. As it was more feasible to do training in Sweden, a dedicated office for trainees was established at SAAB in Sweden, where some of the SA trainees, including HDIs and SAAF personnel, spent more than two years acquiring the necessary skills.

 

The SA trainees achieved such high results that SAAB established a design and development centre within Denel Aviation, which is not only dedicated to the Gripen programme but is available to the rest of the SA industry, both defence and commercial. It must be noted that as this centre is not linked to Sweden only, it will have a major impact on the technologies available to SA companies that can be used to the benefit of the economy.

 

Manufacture of Gripen fuselage parts

[PMG note: graphic(s) not included, please email info@pmg.og.za]

 

 

4. BEE ACTIVITIES:

DIP credits awarded to date for BEE activities amounts to approximately USD3,2 million.

Some of the challenges faced by the foreign obligors in identifying and contracting BEE companies, are:

The above, however, has not put the DIP BEE programme in jeopardy, as some of the foreign obligors have taken up the challenge to find BEE companies that show potential to be uplifted and are able and willing to face the challenges of the international market with its stringent regulations and certification requirements.

This entailed that the OEMs had to identify the exact requirements of these companies and device means to assist them to attain international certification. This assistance includes, but is not limited to the following:

Some of the BEE companies that have been identified by the foreign OEMs and are currently being nurtured, through the established local defence industry, into the OEMs supply chain are:

 

Some BEE companies that are already technically advanced were also identified to launch a fast-tracking programme, as follows:

Sinjana Engineering:

An investment was made by BAE Systems to enable this company to purchase a three-axis numerically controlled milling machine. The first export order has already been placed with this company by BAE Systems.

ETS Holdings:

Manufacturing technologies, equipment and test equipment have been transferred to this company to enable it to manufacture power supply units for the HUMS units which AMS has sold abroad.

It must be noted with regret, however, that after two major cash injections and technical assistance by BAE Systems and AMS, this company has totally failed, and appears to be in the process of liquidation.

TETech Projects:

This company received a formal request for several items of workshop test and ground support equipment. Various orders have been placed on the company for which DIP credits have been approved.

Other:

BEE companies such as Lechabile Quality Systems (electrical test sets), Vacuform (composite materials) and Hartell (textiles) have been identified and have shown great interest in participating in these programmes. To ensure that these companies are able to produce to aeronautical standards and quality, Aerosud has agreed to provide project leadership and mentoring with technical support in the areas of configuration and change control process, resolution of obsolescence issues, and quality control and documentation compliance, which are all necessary for ISO 9000 certification and for certification as an Aeronautical Equipment Supplier.

 

5. CURRENT ISSUES

Some companies in the SA defence-related industry were not ready to absorb/utilise the business opportunities provided by the DIP programme, mainly for the following reasons:

Several other companies in the SA defence-related industry (e.g. AMS, Aerosud, MTU SA, Grintek Avitronics) grabbed the DIP opportunity with alacrity, initially made some expensive mistakes due to some of the problems highlighted above, but learned from their mistakes and moved on. In our experience the OEMs are directing more and more activities to these companies that have proved themselves, rather than persisting with ineffective relationships.

Very few investments were made. The OEMs go out of their way to choose activities that do not require investments.

The absence of quality certification (e.g. ISO) limits the scope for BEE companies, as does the reluctance of OEMs to invest. In our experience the OEMs prefer to transfer the responsibility for BEE contracting to the existing SA defence industry, building in contractual obligations to subcontract to BEE companies. This approach is not objected to, as it ensures the nurturing of BEE companies by experienced defence companies.

Only two years are left on most SDP obligations which leave little time for the industry to change/become competitive. The companies who were not ready or who still are not ready could have lost a valuable window of opportunity created by the DIP programme.

 

6. CONCLUSION:

Although there might be political differences of opinion on the Government’s decision to procure the Strategic Defence Packages and the predicted benefits created by the total offset programme, the National and Defence Industrial Participation, it can be deduced from the figures provided, and notwithstanding the challenges encountered by both the foreign OEMs and the local industry, that jobs have both been created and retained within a very highly skilled environment. The offset programme has also ensured that BEEs were afforded the opportunity to join in the mainstream of the economy, with the resultant wealth creation.

It can therefore be concluded that the initiative taken by the Government to make offset part and parcel of any major state acquisition programme, is and will benefit generations of South Africans.