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CEO
CHANGES DENEL'S DIRECTION
TO FEND-OFF FUTURE LOSSES
Lack
of a captive domestic market and limited access to international
defence contracts adversely affected Denel's financial performance
in the year to 31 March 2005.
While
the company expects to report record losses, new Chief Executive
Officer (CEO) Shaun Liebenberg, who took over the reins
at Denel from Victor Moche in June this year, has already
embarked on changes to Denel's strategic direction.
Speaking
at a special media briefing to announce Denel's turnaround
programme, Public Enterprises Minister, Alec Erwin said
it was in the country's interest that the new Board of Directors
and the CEO come up with a radical plan to make Denel viable
and profitable.
Shaun
Liebenberg is building his macro strategy for Denel around
the global defence environment and the changing nature of
customer needs.
"Changes
in the defence industry have forced consolidation and the
forming of alliances worldwide," Liebenberg said. "Although
Denel has an enviable range of products, we no longer have
a captive domestic market or the scale to succeed as an
independent systems integrator and exporter of such a broad
range of products."
He
was frank about Denel not being viable under the current
model, but said the company's capabilities are attractive
to global prime contractors for partnering.
According
to Liebenberg, global prime contractors succeed due to privileged
relationships with their domestic customer who largely funds
and promotes the development of new system platforms. He
would pursue a strategy that would focus the Denel business
on being a domestic prime contractor whilst becoming a specialised
contractor or sub-supplier to other international defence
contractors.
"Our
analysis of the international defence environment shows
much of global defence spend is not directly accessible
to independent contractors like Denel," Liebenberg
explained. "The US Department of Defense in recent
years has awarded contracts almost exclusively to US and
NATO companies. These companies supply most other markets,
too. Developing nations like India, Brazil and Israel have
strong domestic industries to serve their own customer,
whilst giving intense competition to other independents."
Liebenberg
said Denel meets the pre-requisites to act as a specialised
contractor that could slot into the value chain of the global
players, because it has a technology edge or low cost production
capabilities in several niche areas.
"Moreover,
with some 45 per cent of our business still deriving from
the domestic market, we certainly have access to domestic
defence spend."
Despite
a recent increase in local defence spending, this had a
negligible impact on Denel's fortunes. Much of the domestic
spend occurred in areas falling outside Denel's product
range, eg. acquisition of naval systems. Denel's involvement
was limited to sub-contracts on the SA Navy's corvette weapons
suite and some workshare on the Gripen, Hawk and Agusta
helicopter programmes.
Liebenberg
said changing market requirements also impacted on Denel.
The historic environment was characterised by open range
battlefields with large conventional forces operating heavy
systems. Conflicts now take the form of urban and insurgency
warfare and more recently asymmetric (terrorist) war.
Customers
therefore require more sophisticated surveillance and network-centric
command and control systems, as well as rapid deployment
equipment.
"The
shift to mobile weapons and electronic technologies resulted
in a long term move from heavy vehicles and large calibre
weapons to small calibre and reconnaissance systems,"
Liebenberg said. "Denel has to take cognisance of this
shift, and I'm confident that we have set in motion a process
to evaluate alliance opportunities and to drive internal
improvements across all business units. In fact, some non-viable
businesses would have to be made viable or exited entirely,"
he concluded.
Minister
Alec Erwin said he was happy with the direction Liebenberg
was taking. "As I said in my Budget Vote in Parliament
earlier this year, there was no expectation of a short term
or magic turnaround due to the very specific characteristics
of the defence environment in which Denel operates. Denel
does play an important role in South Africa's technological
capabilities, and I believe the evolutionary process will
result in a strong business entity, serving both the domestic
and international defence markets," the Minister said.
According
to the Minister, the plan on the table will result in the
optimisation of high-level technologies and capabilities
currently located in the local defence industry, giving
South Africa a competitive edge in certain niche global
markets, whilst ensuring continued skills development and
technology transfer.
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