presentation on denel public enterprises portfolio committee winter school 11 august 2009
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DENEL GROUP. PRESENTATION ON DENEL PUBLIC ENTERPRISES PORTFOLIO COMMITTEE WINTER SCHOOL 11 AUGUST 2009. CONTENTS. The history of the SA defence industry Overview of Denel The global defence market The SA defence market Denel’s historical financial performance - PowerPoint PPT PresentationTRANSCRIPT
DENEL GROUP1
Company Confidential
PRESENTATION ON DENELPUBLIC ENTERPRISES PORTFOLIO COMMITTEE WINTER SCHOOL
11 AUGUST 2009
DENEL GROUP
DENEL GROUP2
Company Confidential
CONTENTS
• The history of the SA defence industry• Overview of Denel• The global defence market • The SA defence market• Denel’s historical financial performance• Implications of defence trends for Denel• Denel’s turnaround strategy• Progress: strategy implementation• Denel’s growth strategy• Denel’s values• Denel priorities
DENEL GROUP3
Company Confidential
SOUTH AFRICA’S UNIQUE HISTORY HAS RESULTED IN THE DEVELOPMENT OF A DEFENCE INDUSTRY UNLIKE ANY OTHER NATIONAL MODELS
End June 2009
* in 2005’s price levelSource: Global insight, DoD policy and planning
60’s and 70’s Late 80’s and 90’s Mid 1990’s Today
Arms race End of Cold War Rise of asymmetric warfareWorld
SA Self sufficiency build up
Industrial/technical leader Reprioritisation of defence spend
Industry re-focus
Total SA government spend*
R228b R280b R473b
Defence as % of gov spend
14% 7% 5%
Defence R&D spend
High Declining Low (less than 0.5%)
Export None Some success for SA in overseas markets
Export account for >60% of industry turnover
SADRI position
One of the most significant national activitiesLarge employment contribution (esp engineers)Leading technology development
Denel becomes the leading local companyGovernment purchased large complicated systems from overseas
Many new start upsIndustry reliant on export
Armscor controls production facilities and manufacturing
High
None
R110b
7.7%
DENEL GROUP4
Company Confidential
Overview of Denel
DENEL GROUP5
Company Confidential
DENEL IS A STRATEGIC DEFENCE COMPANY
Personnel employed by Denel Group:
Denel: 5 167
Ass. Companies: 2 129
TOTAL: 7 296
Includes approx. 1400
Engineers & Scientists
With 6 X
Multiplication factor on SA Economy
End June 2009
DENEL GROUP6
Company Confidential
DENEL CONTRIBUTES TO NATIONAL SECURITY AND HIGH TECHNOLOGY MANUFACTURING
• Effective contribution to National Security
– Local industry plays a vital role in security of supply, optimised acquisition, life-cycle support and cost of ownership – 1998 White Paper on Defence
– Sustainable technology base to enable DoD to acquire products uniquely suited to the African theatre of peacekeeping
• Contribution to the economic and manufacturing base
– Skill intensity: opportunity for deep, applied scientific and engineering base
– High-end skills development and retention
• Denel Centre for Learning and Development (DCLD)
• Denel Youth Foundation Training Program focuses on upgrading mathematics and science
• Engineering bursary, internship and mentorship programmes
– IP creation and cross-leveraging in other industries (globally defence industry is a key incubator)
– Denel skills infusion across SA industries (e.g.. electric car programme of DST, PBMR, SALT
telescope)
– Supports an extensive local supplier base: 70%+ local procurement
– Employment multiplier: X6 (6 jobs in the supplier base for every engineer employed)
– Major Forex earnings through exports
DENEL GROUP7
Company Confidential
Denel, DoD and Client Collective 2009 R&D Investment – R1,2 billion
• Sovereign missile capability with niche design, development and manufacturing capacity within Denel, associate companies and local manufacturing base
• Security of supply of world-leading munitions range, with state of the art propellant, chemical engineering and metallurgical competencies
• Independence in brass/pure copper extrusions
• Advanced gearbox, composite structures, combat turret as well as artillery design, development, manufacture, qualification and certification
• World-leading landmine protection/clearance and ballistic protection technologies
• Certified local Maintenance, Repair and Overhaul capabilities meeting international accreditation standards
• State of the art photonics capabilities and associated product/component design, development and manufacturing capacity
• Development of an expanded local engineering and manufacturing supply chain
• Retention of appropriate wind tunnel and mathematical modelling capabilities
• Operational testing/certification and space launch vehicle support
Active participation in DST technology forums: Optronics, photonics, UAVs, micro-electronics, autonomous guidance control and advanced materials.
DENEL PLAYS A MAJOR ROLE IN TECHNOLOGY DEVELOPMENT
DENEL GROUP8
Company Confidential
R&D SPEND TOTALLED R1,2bn IN 2008/09 – NEED FOR STRATEGIC SPEND ON NEW PRODUCTS TO MAINTAIN COMPETITIVENESS
Entity Total Sales(RM)
Own Funds% of Sales
(RM)
Client Funds(RM)
Total(RM)
MechemDenel Aviation/Rooivalk Dynamics (Missiles)Dynamics (UAV)DISSDLSPMP
DSARDM (South/North/La Forge) Carl Zeiss Optronics
Total R&D Spend
267,569910,753571,442144,603
79,437425,021600,552
598,897976,523
385,000
0.11.10.12.6
0.61.4
0.25.2
3.2
0,21910,269
3,0013, 868
2,7318,654
1,11150,824
12,253
92,930
109,788299,042
79,697210,301
399,30718,700
1016,835
0,219120,057302,043
3, 86879,697
213,0318,654
400,41869,524
12,253
1 209,765
DENEL GROUP9
Company Confidential
HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHEDDenel Aviation/Rooivalk
• Helicopter design, qualification and certification
• Certified MRO services and component repair to international standards
Denel Dynamics Missiles
• Applied MEMS technology
• Missile design, development, manufacture and qualification
• Advanced aerodynamic modelling and simulation
• Micro-servos and flight control management
• Advanced materials technology application (carbon-carbon)
• Systems engineering and advanced systems integration
• Logistics engineering
Denel UAVs
• UAV design, development, manufacture, qualification and certification
• Autonomous flight control management
• Mission planning and software certification
DENEL GROUP10
Company Confidential
Denel Integrated Systems Solutions
• Systems engineering and advanced systems integration
• Logistic engineering
Denel Land Systems
• Systems engineering and advanced systems integration
• Integrated ballistic systems design and development
• Turret and ballistic protection design, development and integration
• Main weapon (artillery/rapid fire) design development and manufacture
• Ammunition handling systems
• Logistics engineering
• Hydraulic/electrical/air conditioning/vehicle platform specification and design
• Landward mobility modelling and simulation
• Vehicle/combat system testing and evaluation
• Material and metallurgical specification/design
HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)
DENEL GROUP11
Company Confidential
Mechem (Pty) Ltd
• Landmine protection and clearance
• Chemical Sniffer technology (inclusive of canine breeding and training)
Overberg Test Range
• Flight test technologies and applications
• Satellite telemetry
• Satellite launch and orbital support
Pretoria Metal Pressings
• Brass/copper alloy casting and strip extrusions
• Advanced explosives design and manufacture for military and commercial applications
• Applied detonics for military and commercial applications
• Tungsten carbide mining drill bit design and manufacture
• Powder metallurgy – tungsten-copper (missile grade/switch gear)
HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)
DENEL GROUP12
Company Confidential
Denel Saab Aerostructures (Pty) Ltd
• Aero-elastic modelling and simulation (design and fatigue)
• Applied fracture mechanics
• Advanced aluminium/composite aerostructures design, manufacture, qualification and certification
• Thin-wall aluminium machining and assembly
• Fibrous/carbon composite layups, curing and machining
• Advanced fluid press extrusions
• Non-destructive testing
• Certified surface/heat treatment
Rheinmetall Denel Munitions (Pty) Ltd
• Advanced propellant design, manufacture and certification
• Powder/ball/cast propellant manufacture
• Advanced materials technology application (composite/steel)
• Advanced forging technology
HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)
DENEL GROUP13
Company Confidential
Carl Zeiss Optronics (Pty) Ltd
• Photonics research
• Optical design
• Optical payload manufacture, qualification and certification
• Opto-mechanical design, manufacture and assembly
• Certified opti-mechanical design, manufacture and assembly for space payloads
Turbomeca Africa
• Advanced manufacturing
• Aerospace gearbox manufacturing, qualification and maintenance
HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)
DENEL GROUP14
Company Confidential
The Global Defence Market
DENEL GROUP15
Company Confidential
GLOBAL DEFENCE SPEND IS LARGELY INACCESSIBLE TO INDEPENDENT CONTRACTORS SUCH AS DENEL
Total spend on products in which Denel participates
Rest of World
NATO excluding USA
USA
$b
* FY2000 awards
Source: Forecast International; World bank; team analysis
• Near impossible for independent contractors to serve USA and NATO countries
• Competition to serve remaining markets is intense:– Exports from major
US and European players
– Development of domestic industries (e.g., India, Israel)
– Political constraints and alignments
• Near impossible for independent contractors to serve USA and NATO countries
• Competition to serve remaining markets is intense:– Exports from major
US and European players
– Development of domestic industries (e.g., India, Israel)
– Political constraints and alignments
~55
~81
~170
~190
~34
~360
23% 9% 15%
ROUGH ESTIMATES
100%
Total military purchases
Spend on products in which Denel does not participate
47%53%
Contracts awarded by US Department of Defence*
US companies 89%NATO companies 11%Other companies 0%
Contracts awarded by US Department of Defence*
US companies 89%NATO companies 11%Other companies 0%
NATO land vehicle example
National companies 76%Other NATO companies 22%Non-NATO companies 2%
NATO land vehicle example
National companies 76%Other NATO companies 22%Non-NATO companies 2%
DENEL GROUP16
Company Confidential
BUDGETS ARE DECREASING AND MARKET REQUIREMENTS ARE SHIFTING MAKING IT HARDER TO COMPETE IN THE TRADITIONAL PLATFORM SALES BUSINESS
Source: McKinsey (2009)
DENEL GROUP17
Company Confidential
EMERGING POWERS ARE SHOWING THE HIGHEST INCREASE IN DEFENCE SPEND – COMPETITION TO INTENSIFY IN DEVELOPING MARKETS
Source: IIS (2007) and McKinsey
DENEL GROUP18
Company Confidential
The SA Defence Market
DENEL GROUP19
Company Confidential
SOUTH AFRICA IS SUB-SCALE FOR SUPPORTING A BROAD DEFENCE INDUSTRY
Source: Economist intelligence unit, The International Institute of Strategic Studies, SIPRI; military expenditure database, SIPRI; yearbook 2006, HSS; military balance
• Overall spend too low to sustain complete range of capabilities
• Only China, India, Russia can support defence industry on mid-low GDP
Equipment spend Percent of total defence expenditure (2005)
24.5
26.8
31.5
20.2
41.0
19.0
29.8
58.3
37.0
Defence spend Percent of GDP
Defence equipment budget 2005US$ Billions
4.0
2.2
1.7
2.5
2.6
2.7
2.9
2.6
1.4
123.3US
12.4France
11.9China
11.2UK
8.4India
4.0Russia
3.1Turkey
1.4Eqypt
1.2RSA 1990: 2.2
Source: McKinsey (2007)
DENEL GROUP20
Company Confidential
DEFENCE EQUIPMENT SPEND IS LIKELY TO CONTINUE TO DECLINE
DEFENCE SPEND AS % GDP
1.00%
1.10%
1.20%
1.30%
1.40%
1.50%
1.60%
1.70%
00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12
YEARS
% G
DP
Defence equipment expenditure will come under further pressure due to the recent R1,9bn cut and
increased personnel and deployment costs
Source: DOD (2009)
DENEL GROUP21
Company Confidential
Denel’s Turnaround Strategy
DENEL GROUP22
Company Confidential
DENEL RAN INTO FINANCIAL DIFFICULTIES IN 2005
-1300
-800
-300
200
2001 2002 2003 2004 2005 2006 2007 2008
Rm
-5000
500100015002000
2001 2002 2003 2004 2005 2006 2007 2008
Rm
Losses
Cash utilised
Solvency
-2000-1500-1000-5000
500
2001 2002 2003 2004 2005 2006 2007 2008
Rm
•Denel was set-up in 1992 with a capital of R2 billion.
•The company posted significant losses year on year since 1998, except in 2001 when it posted R40 million profit owing to a once off pension fund holiday. Losses from 2005 to 2008 caused by:
• Loss of export markets• Inadequate orders resulting
in under-utilisation of labour and facilities.
• High interest cost resulting from loans.
• Loss making contracts – Umkhonto, Raptor, UAV’s, Airbus, Agusta & Rooivalk.
• Equity partnership restructuring starting to have effect from 2007.
•Reserves and capital were significantly eroded due to these loses by 2004, necessitating a review and change of the strategy in 2005/06.
DENEL GROUP23
Company Confidential
DENEL DEVELOPED THE TURNAROUND STRATEGY IN 2006: ALIGNMENT WITH THE DOD AND ON-GOING REFINEMENT IS CRITICAL
Implications for RSA and Denel
Changing nature of conflict
– SA now plays a major role as a peacekeeper in the Rest of Africa– Troop mobility and landward renewal expected to be priority for the
DoD– SA industry plays a major role in supplying equipment for
peacekeeping– Need to focus on growth pockets in traditional manned platform
business, fire power support, munitions and log/maintenance support
– Need for alliances and partnerships with global original equipment manufacturers (OEMs) in certain segments
– DoD will need to prioritise capabilities and focus spend on strategically essential capabilities
– Assist the DoD in maintenance and procurement saving
– SA and Denel well positioned with Brazil eg A-Darter missile development
– India impasse needs to be resolved – Pursue technology transfer to access growing markets – SA has exceptional design and engineering skills– Significant demand for unmanned platforms (UAVs) – pursue growth
in this area – Level 5 systems engineering skills will be critical for the future– Explore other high tech areas eg. physical/digital security
Decreased SA defence spend
andinaccessible
global markets
Shifts in technology
Change drivers
Emerging powers
DENEL GROUP24
Company Confidential
DENEL’S STRATEGY SET OUT TO INCREASE MARKET ACCESS, OVERHAUL GOVERNANCE AND TRANSFORM THE COMPANY
Priv
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Bu
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Cap
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P
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P
rod
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ityDenel Corporate GovernanceDenel Corporate Governance
Denel Corporate Office – managing 11 created EntitiesDenel Corporate Office – managing 11 created Entities
People and TransformationPeople and Transformation
Denel Corporate Office Purpose – “The Role of the Centre”Denel Corporate Office Purpose – “The Role of the Centre”
Secure privileged access to a minimum
portion of South Africa’s defence
development and
procurement spend
Partner with State Agencies
to do joint business
planning and to establish export
marketing responsibilities.
These two factors translate into the ‘captive
market’ and ‘political
support’ that make
international major defence
prime contractors successful
Secure equity business
partnerships with major global
players
Focus on growing the commercially viable
businesses where Denel has real technological
leadership. Denel’s other businesses will be ring-fenced, operated under
management contracts or exited
Raise capabilities and productivity to world-class levels
DENEL GROUP25
Company Confidential
SINCE THE LAUNCH OF THE STRATEGY IN 2005, DENEL HAS MADE SIGNIFICANT PROGRESS WITH IMPLEMENTATION
• Denel operations restructured and ring-fenced to isolate risk and drive performance and accountability at business unit level
• Governance policies, systems and processes strengthened across Denel - this will continue to be prioritised
• Entity Boards and Audit and Risk Committees established
• Disposed of non-core businesses and properties to the value of R1bn
• All businesses have turned around except for Missiles and DSA. Denel Integrated Support Systems (DISS) remains a risk area until the Ground Based Air Defence System (GBADS) 2 contract has been secured
• Denel local / export sales mix changed from 40/60% to 60/40%
• Major DoD contracts secured include: – Hoefyster (Badger) Infantry Fighting Vehicle (total R8,3bn, R1,1bn
development contract activated at this stage)– A-Darter 5th generation air-to-air missile development (R1,1bn: RSA and Brazil
funded)– Aircraft maintenance, repair and overhaul (R600m per annum)
DENEL GROUP26
Company Confidential
• Cooperation established with all RSA State Agencies and more being done to further improve situation – major focus on improving DoD relationship underway
• Three equity partnerships concluded with Carl Zeiss Optronics (Germany), Rheinmetall Defence (Germany) and SAA AB (Sweden). All equity partnerships showing a rapid turn around and significant export orders, except for Denel SAAB Aerostructures (DSA)
• Specific aggressive turnaround intervention launched at DSA
• Proactive technical management at Group level with successes achieved in the Ground Based Air Defence System (GBADS) programme, A-Darter and the C-130 and Oryx aviation programmes
• Transformation:– Drive launched in 2007– Transformation committees established in each entity to drive programmes– Key part of entity stretch targets (management incentive programme)– Organisational climate index score of 50 (SA corporate benchmark score =
60) in 2008 for the Denel Group– Major emphasis on bursary, internship and youth training programmes
SINCE THE LAUNCH OF THE STRATEGY IN 2005, DENEL HAS MADE SIGNIFICANT PROGRESS WITH IMPLEMENTATION (CONTD.)
DENEL GROUP27
Company Confidential
DENEL RECENTLY REFINED ITS STRATEGIC DRIVERS TO ENSURE INCREASED FOCUS ON CUSTOMERS, EFFICIENCY AND GROWTH
Towards a Respected South African Company
Transformation, BBBEE, CSI, Branding
Deepen Relationship with DoD and State Agencies
Joint planning, International Marketing Support, Technology and IP Development, Skills Transfer,
Programme Delivery
Improved Access to Sustainable Markets
Equity Partnerships: Existing and New
Local Spend: Home Market Support
Operational Excellence
Performance, People, Skills Development, Outsourcing, Supplier Development
Strengthen Governance and Financial Management
Risk Management, Compliance, Cash Flow Management and Contracting
CUSTOMER FOCUS
EFFICIENCY
GROWTH
DENEL GROUP28
Company Confidential
DENEL HAS ALSO DEVELOPED CORPORATE VALUES TO UNDERPIN THE DRIVERS AND THE ORGANISATION
Integrated multi-disciplinary approach to address culture, ethics, work practices and drive public awareness through internal and external stakeholder engagement
Imp
lem
en
tatio
n
DENEL GROUP29
Company Confidential
Denel Priorities
DENEL GROUP30
Company Confidential
KEY PRIORITIES MUST BE IMPLEMENTED TO COMPLETE THE TURNAROUND
•Denel’s funding guarantees/recapitalisation
•Execute growth strategy
– Finalise End State proposals
– Achieve transformation goals
– Strong political support for exports
– Leverage SEP/Alliances to grow exports
•Interventions to ensure commercial viability
– Measures to reduce working capital requirement
– Build order cover and multi-year orders: local and international
•Denel’s missiles business
– Conclusion of the equity negotiations with the global missiles company
•Denel SAAB Aerostructures:
– Turnaround drive underway
DENEL GROUP31
Company Confidential
Thank You