Challenges of cultivating a Saudi defence industry
Dubai- Faced with the prospect of long-term diminishing oil revenues, Saudi Arabia, traditionally one of the world’s biggest importers of defence supplies, must consider whether its domestic arms output can assume a key role in its rulers’ vision for a diversified economic future.
Saudi Arabia is the world’s third largest defence spender after the United States and China. The International Institute for Strategic Studies said the Saudis spent $82 billion on defence in 2016, a figure that does not include specific military operations, such as the Yemen intervention.
Taking into account ongoing operations, Saudi defence spending may be more than $100 billion a year, which is the combined British and French annual defence expenditures.
With defence accounting for about one-eighth of the Saudi government’s annual expenditures, it has been able to source only 2% of requirements domestically. Hence its accolade as the biggest importer of defence systems.
Prince Mohammed bin Salman bin Abdulaziz, Saudi Arabia’s youthful deputy crown prince and minister of defence, last year released a much-needed road map. Vision 2030 is an ambitious if vague blueprint to reconfigure the national economy through industrialisation, new manufacturing, energy generation, modern infrastructure and tourism, among others.
Defence is a focus area for Vision 2030. Government spending is difficult to cut due to the emerging threat environment but it could be a vehicle to create thousands of jobs.
By 2030, Saudi Arabia needs to create 6 million jobs for new entrants into the labour market. The unemployment rate is about 12% today officially and the challenge has been described a “looming spectre” by Saudi Labour Minister Mufrej al-Haqbani.
Vision 2030 aims to ensure 50% of Saudi defence sourcing is done domestically to retain money within the economy. This would represent more than $50 billion more circulating in the economy if current spending trends continue. The effect of successful Saudi defence industrialisation to its labour market and trade balance would be massive.
The Saudi fiscal deficit is expected to be around 10% of GDP this year, so Riyadh will raise $15 billion from international markets. Its first bond sale raised $17.5 billion last year. Saudi Arabia has a very low debt-to-GDP ratio but borrowing will become more expensive if oil prices remain depressed and if results of government spending do not follow as expected.
With commitments of $110 billion for defence deals with US companies over the next decade announced during US President Donald Trump’s Riyadh visit for the Arab Islamic American Summit, the Saudis are staying American for defence.
Together, these commitments (tentatively) represent the biggest defence deals ever. In part, they may have been a Saudi response to Trump’s criticism of the United States’ partners not paying their fair share for security but the Saudis also want to change the paradigm of how defence spending is transacted.
More security burden sharing with the United States must necessarily result in more profit sharing with American defence contractors to redistribute the financial benefits of their winning contracts in the world’s most lucrative defence export market to support Saudi Vision 2030.
Trump spoke of the “tremendous” deals translating into “jobs, jobs, jobs” as the United States tackles a go-slow economy. Riyadh will be hoping for economic windfalls of its own with job creation at home. At face value, it’s a win-win situation. Riyadh wants its American industry partners to help localise defence supply chains as far as possible and to work with Saudi firms to develop capacities in return for being awarded massive contracts.
The Centre for Strategic and International Studies’ Anthony Cordesman, a leading American authority on Gulf security, and other experts voiced scepticism about the feasibility of Saudi defence industrialisation. Cordesman said that efforts to develop a fully fledged defence industry lack sound economic logic and that the Saudi model cannot succeed. Manufacturing defence system components in one place — such as the United States — and assembling them in another — in Saudi Arabia, for example — add supply chain costs, complexity and risk to the extent that commercial viability breaks down.
At best, Riyadh can only force US suppliers to assemble in the kingdom. Manufacturing is many years out of the question but support services is an area the kingdom will need to target and the country does have a nascent defence industry on which to build a foundation. Its three leading players — the Military Industries Corporation (MIC), Advanced Electronic Company (AEC) and Alsalam Aircraft Company — will soon be joined by the recently announced Saudi Arabian Military Industries (SAMI) company.
The Saudi challenge for developing a defence industrial base boils down whether it is possible non-organically by importing expertise or forcing partners to help build local capacities, developing and aligning supporting infrastructure and getting the right people trained in the right way in such short timeframes.
The case for Saudi defence industrialisation is economically persuasive and logical but is Riyadh aiming for too much too quickly or is it a case of too little too late given its inability until now to achieve any meaningful self-reliance?
Saudi ambition may still need to demonstrate its defence industrialisation strategy can be facilitated, not hindered, by commercial principles such as return on investment and efficiency.