August 28, 2018 |
By: Jill Aitoro
LONDON — In spring 2016, Crown Prince of Saudi Arabia Mohammed bin Salman unveiled a plan to reduce the country's dependence on oil and to diversify the economy. The goal of Saudi Vision 2030, as that plan is known, is to make Saudi Arabia “the heart of the Arab and Islamic worlds, the investment powerhouse, and the hub connecting three continents.”
Among the sectors central to that vision is military. Taking cues from other countries in the region, Saudi Arabia stood up a single umbrella organization to lead its efforts in defense development and expertise: the Saudi Arabian Military Industries. Defense News spoke to CEO Andreas Schwer in an exclusive interview about the goals of SAMI, and what it could mean for global defense partnership and cooperation.
You lead the Saudi Arabian Military Industries. I would love for you to talk a bit about how SAMI, as it's known, was stood up and the goals of that organization.
When the Vision 2030 program was established and defined by his royal highness, it became apparent right from the beginning that the defense industry would play a major role to achieve these global targets. So the defense industry, set up, is one of the major tasks of the Vision 2030 program. They established a team to define how this kind of defense industry should be set up. They were looking to comparable countries who are undergoing this kind of process — countries like Turkey, South Korea, South Africa or some Western countries. They have tried to learn the lessons out of that process.
It was obvious that there are two choices: either to go for a [new company], or to use existing assets and to build up on those assets. They decided to go [new] in order to enhance the opportunity to implement best Western practices from the beginning. That was the key decision to go ahead, and they decided to build a nucleus which is covering any kind of [military] activities, starting from space, ground or naval activities under one big umbrella company to set up a kind of sustainable business instead of having different companies of smaller size.
Are they operating relatively independently, or is it really one management structure?
SAMI itself is acting as a kind of active holding company. We will operate through four business divisions. Each of the business divisions will be composed of a set of business units. A business unit is a joint venture with a foreign partner, but it would also integrate the existing assets in the kingdom into this umbrella environment; assets which are already joint ventures today but also nationally owned assets, which will be allocated to the various business divisions.
I know you have an extensive career with defense companies. You were with Rheinmetall, and you spent time at Airbus. What interested you about this opportunity?
It's quite unique overall in the world that to set up a new company which covers, again, all the product portfolio you can imagine. Space, aviation, land systems, hydraulic simulation, ammunition, shipbuilding, everything. I don't think there's any job in the world which offers you this kind of broad portfolio of activities. So it's unique. It's a once-in-a-lifetime chance. And the second argument is it's fantastic to set up a company. You can apply all your ideas, all the activity to form and shape something which otherwise you will never be able to do, versus ending up in an organization where almost all elements are predefined and it's hard to implement any kind of significant change.
You have said that the goal for SAMI is to become one of the largest 25 defense companies in the world by 2030. How do you intend to make that happen?
Saudi Arabia has the third-biggest defense budget in the world. It's around $70 billion throughout the year. On top of that, we have to look to all the budgets for the other customers on the domestic scene. It's the National Guard, the Royal Guard, Ministry of Interior, homeland security. There are lots of national customers [for] security-related equipment. Most of that will end up at SAMI's desk. So just by the volume and the size of the procurement, it's achievable, [also with] export potential of 30 percent. With that, you can easily achieve the target to become among the top 25 companies in the world.
The Pentagon started working with Saudi Arabia on some very sizable foreign military sales from the United States, with the Trump administration very vocal about supporting that. How does that fit into the picture?
There are lots of partnership opportunities. Those [foreign military sales] will be subject to our new scenario. We will apply for each and any of those contracts with the 50 percent localization rule, to be in line with Vision 2030. And whether it's a foreign military sale or whether it's a direct commercial sale, those sorts of buys will offer in all the local industries great opportunities for growth.
So it's a good opportunity? You would say it's a positive?
It's possible. But we have to make the target. We have to grow the local content from the 2 percent to more than 50 percent of the total span, new procurement, and [maintenance, repair and overhaul]. That's the target: 50 percent localization.
That brings up an interesting point. Saudi Arabia has long voiced, like many countries in the Middle East, a desire for more indigenous capabilities. You mentioned the 50 percent localization in terms of contract opportunities, but how else can SAMI promote those aspirations?
In the past, we've had the classic vendor-buyer relationship. Saudi Arabia was the classic buyer with very, very little local content. There were offset obligations, but most of the times they were never being fulfilled for different reasons. In the new scheme, we change from this kind of supplier-vendor relationship to a partnership model, a partnership model to the extent that we expect the foreign partner — under the terms of their exclusivity access to Saudi Arabia — to bring all their technologies, all the skills and knowledge into the kingdom. That typically is established through a joint venture so we can build up local competence not only by getting licenses for production, but in the engineering and R&D field to be able to develop the next generation of weapons systems, within the joint venture, within the kingdom.
And you established a joint venture with Boeing. Can use that as an example?
Saudi Arabia has a very long-lasting, strategic relationship with Boeing. It started many years ago, and we already have an established joint venture in the kingdom, where we conduct substantial aircraft MRO activities. Our future collaboration is obviously centered around this activity and will be expanded along the portfolio of Boeing products. Boeing is a showcase. Boeing is one of our most important partners.
What does Saudi Arabia bring to the table both in terms of location, and technological capabilities? What is ripe for expansion within the country to support the military industry?
As I mentioned before, we're the third-largest defense budget in the world. If you compare this budget with smaller budgets in other countries and if you compare what they have achieved in terms of localization — we have all the ingredients which we need to have in order to make this a success story. We will invest not only in the defense industry, but we also do a big push in the education system in universities, in any kind of area which needs support in order to get this industry up and running, to support the creation of jobs, to fulfill the Vision 2030. SAMI's obligation is to create more than 40,000 direct jobs, more than 100,000 indirect jobs, to achieve the target as defined.
Are there things that the United States and other allies can do to better support Saudi Arabia with this military expansion?
If there was a wish, we would love to get more access to top-class technologies from all the U.S. partners. There are obviously limitations, which we are suffering from. That's the one element. So be a little bit more open.
And second, export in arms and weapons was driven by FMS programs. In our new set up in Saudi Arabia, we will do more and more in direct commercial sales. Why? Because this office has more flexibility, more opportunity for follow-up in the organization in a more time-effective manner. And yes, companies have to be trained, in that they have to change the mindsets and mentality in order to do this kind of normal type of commercial sales activity and to become a commercial partner on an industrial level rather than on a political or governmental level.
They'll need to convince the Pentagon to allow them, too, because there's a lot of cases where the Pentagon tends to put in restrictions and wants to be in control of that relationship.
You are absolutely right. This is a burden on the U.S. companies, and I wish them all the best in order to overcome the hurdle [so we] will be equally treated as many other companies who are not restricted by their governments. Some western European countries, for example, are offering much more support in that respect. Offering more opportunities for the companies to transfer their ideas, their technologies into the kingdom.
Saudi Arabia had a bit of a shakeup in terms of its own military leadership. Where does that stand, if you don't mind my asking, and how does that influence the formation and growth of SAMI?
The Vision 2030 program has many elements. So it's a transformation program, not only for society but also for the governmental administration. And as [the armed forces] are part of this administration body, they also have to undergo this transformation process. This is an ongoing process. The first steps have been done. One of the outcomes is the creation and foundation of the new regulatory body, which is the twin to SAMI, to host a centralized procurement agency, which they regulate and control and manage any kind of military and defense-related or security-related procurement action. This will ensure critical mass, synergy effects, volume effects, and allow us to build up a kind of sustainable business.
With this kind of transformation, obviously, the roles and the responsibilities of administrative bodies, as well as leaders in the forces, have to change. And in line with that, some people have to be replaced, to be in full support with this new vision and to be completely in line with our targets, and I can tell you we have relationships with all the national stakeholders, and we consider ourselves with them as partners. They are no longer a client, we are no longer vendor to them; we are partners.
You mentioned R&D. What areas do you see the greatest potential in terms of investment for development and product development?
We will put our focus on software technologies, electronics, microwave, space-based technologies, robotics, laser weapons systems on the midterm and long term, but in in the short term we have to give the short-term needs, which are conventional in nature. So, in the beginning, as all the other companies are doing, are on the classical systems.
How do you meld what Saudi Arabia as a nation needs for its own military with the potential for global export?
Upmost importance and top priority is the security of the country. That means, yes, our top priority is to serve the needs of our armed forces, and we try in parallel to satisfy also the needs of our strategic partners. In most of the cases those are quite complementary.
You see a lot of efforts in the United Arab Emirates to bolster defense. Is there a collaboration between the military organizations that are stood up in a country like UAE and what you're trying to establish in Saudi Arabia?
Top leadership of UAE and Saudi Arabia have recently agreed on a strong collaboration on defense, and defense industries, so we are highly encouraged to align our thoughts and to align our strategies with our counterparts in the UAE. This process is ongoing, but we've had very fruitful collaborative talks, and soon we'll hopefully be in a position to announce some great, common achievements.