How the UAE Defence Sector is Evolving from Importer to Exporter
The UAE’s ambition to develop an indigenous defence industrial base offers opportunities for foreign defence companies beyond the Gulf nation’s prolific buying volume of aircraft, weapons and military hardware.
Recognised as the world’s fourth-largest defence importer, the UAE accounted for almost 5% of global defence imports in 2011. Between now and 2016, with an annual defence budget of around $10 billion, the UAE is projected to spend almost 6% of its GDP on defence.
However, the scale of UAE expenditure goes further than obvious strategic objectives of ensuring protection of its oil and gas infrastructure and its wider regional security concerns. With greater intent than any of its GCC neighbours, the UAE is building its own defence industry through collaboration with foreign defence contractors, as it seeks to change from being an importer of defence capabilities to being an exporter.
In this blog post we’ll examine how this evolving defence strategy of the UAE is motivating North American and European defence companies to set up operations in the country, and also the growing importance of the MENA region to the global defence sector.
Arabian Gateway is an event designed to assist international defence companies expand into the MENA region, using the UAE as their gateway. Backed by Dubai FDI and Dubai Chamber of Commerce, and with local regional delegates actively looking for partnership also present, the event offers a high level of privileged networking and introductions. Learn more about Arabian Gateway and its comprehensive program agenda here.
Inside the MENA Defence Market: KSA & UAE the Big Spenders
The defence industry’s future is increasingly shifting to the Middle East and Asia, with both of these regions continuing to spend heavily on developing military capability while Western defence budgets are being steadily trimmed.
Growth in the Middle East market is clear. Military expenditure in the MENA region was estimated at USD $91 billion in 2010 and is expected to reach USD $118.2 billion by 2015, according to Al Masah Capital.
Saudi Arabia and the UAE lead defence spend in MENA. In 2010, Saudi expenditure totalled USD $45billion, followed by the UAE (USD $16billion), Algeria (USD $5.7billion) and Kuwait (USD $4.6billion).
High levels of military spending by MENA governments as a percentage of GDP is evident in the graph below. In comparison, North American expenditure was estimated to be 3.8% of GDP between 2001 and 2010.
The buying pattern of the MENA region has typically centered on large quantities of aircraft, missiles and armored vehicles, with the UAE among the most active buyers of arms in the international market (Al Masah Capital). During 2005–10, the UAE accounted for 35% of all major conventional weapons purchases in MENA , followed by Algeria (21%), Egypt (16%) and Saudi Arabia (13%).
Defence Offset Policies in the Middle East
Very few countries in the MENA region have an offset policy for defence contracts, which, when combined with their prodigious budgets, creates an especially attractive market.
MENA nations that do operate offset programs set their offset percentages at levels much lower than other parts of the world. Average offset programs in the EU, for instance, are estimated to be 135%.
Offset policies of the GCC’s biggest players (Al Masah Capital):
· Kuwait: the value of offset obligations is estimated at 35% should the value of the defence contract be USD $10 million or more
· Saudi Arabia: a minimum offset of 35%. KSA has not stated a threshold for which the offset obligation kicks in
· UAE: the most extensive offset policy among MENA countries. A minimum offset of 60% should the value of defence contracts be USD $10 million or more
UAE the Leading Defence Manufacturer in GCC
The UAE has identified the development of its own defence industrial sector in order to become a global manufacturing base for defence R&D and evolve into an exporter of high-tech, high-margin military hardware.
Over the course of the last decade, on the back of its offset program and Free Zone initiatives, the UAE has made significant progress on this front and successfully positioned itself as the leading defence manufacturer in the GCC – including its bigger spending neighbour, Saudi Arabia.
In 2010, the joint efforts of international contractors and UAE’s private sector are believed to have created over 40 commercially viable and profitable businesses, attracting foreign investment in excess of USD $2.2 billion (Al Masah Capital).
Lockheed Martin, Boeing Co. and SAAB are examples of international companies who have set up joint venture operations in the UAE. Locally, UAE government-sponsored companies such as Mubadala, Tawazun, Abu Dhabi Ship Building and International Golden Group are producing armoured land vehicles, weaponry and naval vessels for international supply.
The Free Zone Advantage
Free zones in the UAE offer especially favourable conditions for foreign defence companies to develop, research and manufacture military technology and hardware. Free zone businesses can be owned outright and enjoy full repatriation of capital, protection of IP and exemption from company and personal tax. From a manufacturing and logistics perspective, free zones offer cheap energy, access to highly advanced infrastructure and the advantage of affordable leasing of warehousing, machinery and storage.
Industry leaders will be present at Arabian Gateway to discuss the benefits and implications of setting up your business in free zones or engaging in local partnerships, as well as critical issues of transparency, intellectual property rights and protecting your investments in the region.
Arabian Gateway is a comprehensive seven-day program, with delegates attending the first two days in the city closest to their current business premises (London, New York, Sao Paolo, Singapore, Sydney or Johannesburg). The final five days take place in Dubai, at the JW Marriot Marquis, from 25th-29th May 2014 (Flights and accommodation included). Book your place today.