A region traditionally characterised by social and political unrest and by vast oil wealth, the Gulf is one of the world’s most important regional defence markets. This IHS white paper examines current defence trends and themes, and proposes five key elements that A&D companies need to understand in order to do business effectively in the region.

Doing Defence Business In The Gulf: Five Things You Need To Know

IHS White Paper Doing Defence Business In The Gulf: Five Things You Need To Know

Introduction

The economies of the Gulf states continue to face a challenging growth path, with risks remaining elevated as the region searches for stability and recovery in the wake of last year’s Arab Spring. With the Iranian economy reeling under sanctions and a sharp contraction in Syria’s GDP, given the ongoing crisis there, IHS projects real GDP growth in the Middle East to slow to 2.8 per cent in 2012, despite a 4.6 per cent bounce in the six-member Gulf Cooperation Council (GCC – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates).

Chart: IHS Jane’s Defence Budgets

The oil-exporting GCC countries will receive a further lift from rising oil production and continued public spending and investment in 2012, but will see softer growth in 2013 as oil output is curbed in accordance with lower prices and weak demand.

Overall GDP growth should bounce back to 3.6 per cent in 2014, although much will depend on regional geopolitical developments and outlook for the global economy.

Amidst improving economic conditions defence budgets in the Middle East and North Africa saw growth of 6.1 per cent in 2012, significantly higher than the 0.2 per cent achieved in 2011. Regional spending on defence is now thought to have reached USD132 billion annually, and is expected to surpass USD150 billion by the end of 2016.

Current Themes

Broadening procurement

Gulf states have historically bought friendships and support through materiel acquisition. Historically, the principal suppliers were French, American and British.

Warming ties with new suppliers (e.g. India, South Korea and Singapore) plus Eastern powers (Russia, China) point to broadening supplier relations as global power balance shifts.

Oil reliance

High global demand for hydrocarbons is fuelling military investment, but discretionary capital funding has historically suffered during periods of low prices. Military investment is being used to drive economic reform agendas.

Economic transformation

Goals of economic diversification, reduced energy reliance, local employment and training and reduced foreign-labour reliance are common throughout the Gulf. Military investment via offset benefits is yoked to wider long-term economic goals.

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IHS White Paper Doing Defence Business In The Gulf: Five Things You Need To Know

Offset reform

Gulf states have demanded offset for more than 20 years. Historically the emphasis was on local defence co-operation with a laissez faire approach to compliance. Gains were minimal.

Post-2010 reforms have put emphasis on more structured obligations with greater realism and tolerance of indirect commercial benefits in line with economic transformation goals.

The Arab Spring

The unrest accelerated reform programmes, with emphasis on social programmes, local employment and investment. Billions of dollars have been aimed at quelling discontent, with the risk that procurement funding may suffer.

In addition, the uprisings put the political focus on European arms sales to the region. For example:

Switzerland cancelled laser targeting deal with Qatar

Israeli “Operation Cast Lead” led to UK export license suspensions

Proposed sale of 200 German Leopard 2 MBTs to Saudi Arabia caused pan-political disquiet

Spanish exports to Morocco were reviewed in 2011 following concerns of “improper use”

Resignation of Sten Tolgfors following Sweden/Saudi Arabia defence industrial co-operation reports

French contracts with Syria / Yemen frozen

The Arab Spring was a social media uprising; as such lessons learned are likely to lead to an emphasis on cyber-security and intelligence capabilities across the region.

Defence Spending Drivers and Current Threats

Internal unrest: Risk of extremist activity / social unrest apparent – enhancement of intelligence capabilities inevitable

Critical infrastructure security: Investment in critical infrastructure security high, but vulnerabilities remain. Broad area surveillance (e.g. UAV systems) lacking

Maritime Security: Spread of piracy from Gulf of Aden threatening trade and driving procurement of maritime surveillance and interdiction solutions

Regional threats (Iran / Iraq): Air defence and land systems modernisation / procurement apparent across Gulf markets – fear of further deterioration of regional security environment driving spending. US draw-down in Iraq an added factor

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IHS White Paper Doing Defence Business In The Gulf: Five Things You Need To Know

Five Key Defence Business Factors

1: Security alignment

Major suppliers to Gulf States typically have far reaching government-level security commitments in place:

The UK’s past success in Oman is based on support for the Sultanate against internal uprising in 1970s, and current commitments remain strong

The French position in UAE is underpinned by the 1995 signature of a common security agreement

Kuwait’s military doctrine is based on an assumption of US support

Suppliers gain leverage from these commitments, and opportunities are best pursued within this context. 2: Political alignment

Materiel procurement is typically used as a means of cementing relations and achieving broader aims. Political alignment is therefore vital for successful business.

Step-change defence agreements have historically been preceded by favourable government-to-government developments in areas ranging from border-demarcation to bilateral trade.

Gulf States have taken a dim view of negative attention from supplying countries. UK – Saudi Arabian defence trade was briefly threatened by a subsequently terminated UK Serious Fraud Office (SFO) investigation

The political element of an A&D opportunity should not be underestimated.

3: Visibility and the importance of market dynamics

Procurement practices in the Gulf are typically opaque, and decision-making processes seldom follow formal structures. With this in mind, achieving visibility is essential...but may be challenging.

Alignment with a well-connected in-country partner is typically advisable, and an understanding of internal market dynamics and the relations of decision-makers is essential – in this market regular, actionable customer intelligence is invaluable.

4: Trust through energy and infrastructure

Closer defence procurement relations have frequently been preceded by closer relations relating to major infrastructure and energy programmes.

From a customer perspective, defence procurement opportunities are part of a wider business landscape – they do not exist in isolation – and this attitude may be exploited.

5: Existing in-country presence / partnership

Partnerships and joint ventures are encouraged, and are a prerequisite of success in the Gulf.

The establishment of local partnerships ahead of contracts should be considered a key part of a successful procurement process.

Summary

The Gulf states represent a significant opportunity for A&D businesses, and despite challenging conditions the region remains a growth market – particularly the GCC member states.

Successful defence procurement in the Gulf hinges on effective planning and partnership, with a need for high-level relationships that stretch beyond the contracting authorities.

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IHS White Paper Doing Defence Business In The Gulf: Five Things You Need To Know

About IHS

IHS (NYSE: IHS) is a leading source of information and insight in pivotal areas that shape today’s business landscape: energy, economics, geopolitical risk, sustainability and supply chain management.

Businesses and governments around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence.

IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS employs more than 6,000 people in more than 31 countries around the world.

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