Denel will have to make tough calls if it is to survive, its new chief executive, Shaun Liebenberg, said on Tuesday.
Addressing the media in Pretoria on the company’s future plans, he said nothing is sacred and even pet projects such as the Rooivalk attack helicopter will need to perform or be canned.
”Our analysis of the international defence environment shows much of global defence spend is not directly accessible to independent contractors like Denel
”Furthermore, changes in the [global] industry are forcing players to consolidate, build alliances and carefully focus their businesses.”
In 1992, there were more than 30 defence contractors in the United States alone. Today there are five, he added, saying the power of these companies — and their European equivalents — is sufficient to muscle companies of Denel’s stature out of most markets.
Although world defence spending is estimated at $1 850-billion, only $360-billion is spent on procurement.
Fifty-three percent of that amount is spent on markets in which Denel does not compete, such as submarines.
Of the remaining 47%, 32% is the US and Nato market that independent contractors, such as Denel, have great difficulty accessing.
In the remaining 15%, Denel faces stiff competition from the US and European players, as well as other independents such as the Chinese, Israelis and Indians — and political constraints.
Funding crisis
As a result of this, Liebenberg expects the company to post a loss of between R800-million and R850-million for the year to March 31 2005. He also expects a loss for this financial year.
The loss is about evenly spread across the group — there are no great losses offset by great profits.
Many of the company’s facilities are critically under-utilised and several of its businesses are bleeding badly — Denel Land Systems Lyttelton, for example, costs R190-million a year.
”Denel is facing a funding crisis, and there is significant risk associated with the current financial projections. Denel is not viable under the current model,” Liebenberg said, adding the model dates back about 20 years to when the company had a captive domestic market and could hold its main customer hostage in terms of price, delivery date and product capability.
”It no longer has the domestic market and scale to succeed as an independent systems integrator and exporter of a broad range of products.
”To succeed, Denel should pursue a strategy based on prime contracting in the domestic market and the export of systems and components through selective equity partnerships and alliances with global prime contractors,” Liebenberg said.
Denel will therefore seek from the government a guaranteed minimum proportion of the South African defence development and procurement spend, and partner with other state agencies and private industry.
”We are at present, in may instances, competing with other state agencies. There can be no ‘us and them’ … the industry and market is too small for that,” he said.
Denel will further focus on growing its financially viable businesses, especially those where the company enjoys ”real technological leadership”.
Other businesses will be ”ring-fenced” to prevent their losses from absorbing the profits of more successful ventures, operated under management contracts or closed down.
Partnerships
The company, which will remain totally state-owned for now, will also seek to achieve economy of scale through two to four equity business partnerships with major global players.
A prototype of these arrangements is currently being forged in the aviation field, where Denel is speaking to the Grintek-Kunene Brothers-Saab (GKS) group.
”To succeed in the aerospace business requires scale and some very specific skills,” Liebenberg said.
Equity business partnerships, such as the one contemplated with GKS, are better than teaming arrangements as the latter are restricted to temporary synergies, limited programme funding and risk sharing.
In terms of equity business partnerships, Liebenberg seeks deep, permanent synergies, meaning both companies will restructure businesses to focus on complementary capabilities, creating a shared destiny that will give the partner a real incentive to make Denel a success.
The implications are that Denel will have to give up those capabilities where it does not have a distinctive edge and share control over its businesses.
”However, this is better than an ongoing struggle to secure export and break-even revenues.”
Where equity-based alliances cannot be secured, ”we will have to evaluate other management models”, Liebenberg said.
This will include Denel acting as a supplier where there are sufficient local markets or export market access, and as an independent alliance partner where that is not the case.
It will also manage state assets under contract, with clear incentives to deliver optimal performance.
Liebenberg said the strategy is already being implemented.
To help the company through its funding crisis, the National Treasury is extending it a R1-billion loan.
”We have to go to the minister of finance and he’s a tough guy to deal with,” Liebenberg said of Trevor Manuel and the presentation of business plans to the Treasury to secure the funding.
Minister of Public Enterprises Alec Erwin, who attended the press briefing, said he fully supports the changes Liebenberg is planning to make to the company and its modus operandi.
”Do we support this? Yes … He has a mandate from the shareholder, otherwise he would not have had this presentation … This is something we back fully.
”As I said in my Budget vote in Parliament earlier this year, there was no expectation of a short-term of magic turnaround due to the very specific characteristics of the defence environment in which Denel operates.”
Asked how long the turnaround will take, Erwin said it will be unrealistic to seek a profit in the next three years. — Sapa