Denel's new pilot hopes to avert disaster

Keith Campbell

South African loss-making State-owned defence industrial group Denel is, over the next three to four years, to undergo what is arguably its most radical restructuring since the company was created in 1992.

“It is too late to turn Denel around,” announces group CEO Shaun Liebenberg bluntly.

“We must change Denel - every-thing has to change fundamentally,” he affirms.

“Denel will remain a 100% State-owned company, but will effectively become an investment-holding company, with investments in subsidiaries and associated companies,” he explains.

These companies will be in 'technology clusters' which currently number five (although this number may change slightly): infantry and artillery systems; munitions;' aerospace' (mainly missiles and unmanned air vehicles); optronics; and 'aviation' (aerostructure manufacture, and maintenance and repair services).

“Our shareholding in these subsidiaries could vary from a majority to a minority, although the government will always, through us, hold a 'golden share' to protect South African strategic interests and intellectual property,” he elucidates.

“The other shareholders in these companies could, in each case, be local companies, international ones or a mixture of both,” he points out.

“The management of Denel is already becoming a decentralised management - we are in the process of giving responsibility and accountability back to the operational units,” he reports.

“The Denel head office will move to offices on the Denel Aerospace (formerly Kentron) site in Centurion,” he reveals.

Instead of an entire head office complex with four buildings, there will be a very slimmed-down head office in just a single building.

“We have not yet decided what to do with our current Pretoria head office site, which we own,” he states.

These decisions are the result of careful analysis of local and inter-national market conditions and trends and of Denel's own position in them, and of its product lines.
“We started by asking what the key issues were that would drive a new strategy for the group and we identified five,” says Liebenberg.

These were global trends in the defence environment, the funding and financial position of Denel, a new business model for Denel, culture and behaviour of Denel with regard to partnerships, and the question of the company's strategy versus its organisational structure.

Three main global trends were highlighted with regard to the defence environment.
“Firstly, global consolidation - for example, in the US ten years ago there were 32 major land-systems manufacturers; today, there are ten, and there is a similar pattern in Europe,” he points out.

“Secondly, the procurement/acquisition mentality has changed, in terms of the types of technologies being bought - a decade ago, it was heavy systems; today, it is lighter' network-centric' systems,” he adds.

“Thirdly, the global market is becoming more and more competitive - many countries that previously had no defence industries are now creating them and competing with us; how can Denel grow its export business in this ever-increasing competitive environment?” he queries.

This naturally led to the issue of the group's business model.

“We made the decision that Denel is not viable under its current business model; this means we have to move from being a fully-fledged global prime systems developer to becoming a local prime systems integrator and a supplier of subsystems and components to the local market in cooperation with other local industry players, global original-equipment manufacturers (OEMs) and suppliers,” he reveals.

“This is a complete and radical shift in our business model,” he affirms.
The main reason for such a shift is that to compete successfully in the defence industrial environment requires huge capacity, significant throughput and critical mass; but South Africa's defence budget is “only a fraction” of what Denel would need to maintain the breadth and depth of everything it is doing and making at present.

“We make everything, from 5,56 mm ammunition to the Rooivalk attack helicopter, and all that is in between - imagine the research and development and intellectual property required to keep all this updated,” he spotlights.

“We would need about five times Denel's current revenue to do so - that's why our current business model is not viable,” he asserts.

The fourth key issue identified and examined was the group's culture, behaviour and commercial make-up relative to the concept of 'partnering'.

“How good are we as a company at partnering in alliances on a long-term, trusting and sustainable basis?” queries Liebenberg.

“Our assessment was that Denel had a culture of 'we don't need anybody - we can do it ourselves', while, in fact, the most successful companies around the world have an absolute dedication to partnering; the more partners they have, the more joint projects they do, the more successful they expect to be,” he argues.

True, Denel operates in the defence sector, which might be expected to involve secrecy, but the brutal fact is, Liebenberg points out, that the company has no technologies that have not also been developed elsewhere, so there is really nothing to hide.

“Partnering could be with local and international companies,” he states.

Then there was the question of the company's strategy versus its organisational structure.

“We found continual turmoil with regard to organisational structure - there was never a single integrated South African view held by all our stakeholders as to what Denel's strategy should be,” he reveals.

“I refer to the Denel executive vis-à-vis the board, vis-à-vis Armscor, the Department of Defence, the South African National Defence Force (SANDF), the Department of Public Enterprises, the Department of Trade and Industry, the Department of Foreign Affairs (involved in export authorisations) and the unions - there has never been an integrated strategy and therefore there was chaos with regard to organisational structure,” he asserts.

“The result is that we have one of the lowest productivity levels in the world in the type of business we are in,” he reports.

“Government policy is that we must be able to live off our own balance sheet,” he points out.

“I am trying to develop an agreed integrated strategy and bed it down, so that commonsense business logic will apply, creating a commercially-sound company,” he assures.

“So what did we do? We looked at five key imperatives for success from successful defence companies around the world,” he explains.

The first of these is a captive market; State-owned defence companies have captive domestic markets which they can rely on for as much as 70% of their sales (this is not the case for Denel).

“Second is the consistent, relentless, political support that overseas defence companies, including those in the private sector, get from their national governments - around the world, major defence contracts are concluded at the highest level, after lobbying by even heads of State and government,” he stresses.

Figures such as US Defence Secretary Donald Rumsfeld, UK Prime Minister Tony Blair, French President Jacques Chirac and Russian President Vladimir Putin have all lobbied on behalf of the products of their national defence industries, just as their predecessors did and their successors will.

The third key imperative is focus, the fourth partnerships and the fifth excellence in execution. The strategy that Liebenberg is proposing to the group's shareholder and stakeholders has six elements.

“First, we need privileged access - that does not mean that Denel should be given business for nothing, on a subsidised basis; but it does mean that we need to know the government's industrial-procurement policies, the plans for the defence budget and when the money is going to be spent,” argues Liebenberg.

Denel dare not invest in any significant new projects unless it is reasonably assured that the SANDF will buy enough of the systems in a timescale which would make the project economically viable.

Next on the list is to interact with the group's stakeholders - all the concerned government departments and agencies - to get them to work with the Denel board and executive to create a successful company.

“Thirdly, do reality checks on the commercial viability of each and every one of our businesses and do an analysis of where we can be truly competitive,” he says.
“From this base, how do we enhance what we have got? How do we fix what is fixable?”
“And, maybe, we should recognise that some of our businesses should be exited,” he warns.

The fourth leg of the strategy has already been described - the disassociation of Denel into “four to six technology clusters”, from which could be created some sustainable value-adding partnerships, preferably on an equity basis and with long-term formal alliance partners.

“These partnerships should include local companies such as Aerosud, Advanced Technology & Engineering (ATE), Grintek, Reutech and others,” he assures.
(Liebenberg came to Denel from Grintek, a private company.) There would also be international partners.

“Fifth, is to regain excellence in our abilities, capacity and delivery,” he asserts.
If these five elements form the pillars of the strategy, the sixth element enfolds them.
“This is the asset we have in our people, many of whom are world-class in their particular fields of expertise,” he highlights.

“Transformation in the form of employment equity, gender and skills development remains a priority of everything that Denel will be doing in the future,” he assures.

“This has been the easy part, devising the strategy - the challenge is to implement it,” admits Liebenberg.

“But the climate for changing Denel is now better than it has ever been before, with support from the shareholder - meaning all quarters of the Government - the board and local and international industry,” he enthuses.

“This support has, quite frankly, been overwhelming and, without this, it would be very difficult to take Denel into the next phase,” concludes Liebenberg.