Idex 2015: UAE defence industry helps to diversify economy

The home-grown Enigma armoured personnel carrier is not just a way for the UAE to carry troops into battle; it represents how the defence industry is helping to diversify the country’s economic base.

The UAE is boosting its defence sector through the creation of a new state champion, Emirates Defence Industries Company (EDIC), and offset agreements with major international arms companies to help develop sector-specific expertise.

The country devotes about US$20 billion of its budget to military spending. That puts it in 15th place among the world’s big military spenders. But national security is not the only reason for this level of expenditure.

“It looks like increased defence spending, but really it is industrialisation,” said Sabahat Khan, senior analyst at the Institute for Near East and Gulf Military Analysis. “The increased spending is primarily for its economic benefits – and to lay the foundations for bigger things.

“From armoured vehicle manufacturing to satellites, from maintenance, repair and overhaul to flight training academies and geospatial mapping, the UAE is doing a lot,” he said.

Along with sectors such as finance, trade and tourism, defence is rapidly becoming a key plank in efforts to wean the economy away from dependence on hydrocarbons. It is a theme that is being played out across the Arabian Gulf.

“The defence sector is one of the main cornerstones of the UAE’s diversification efforts,” said Ali Majed Al Mansoori, the chairman of Abu Dhabi’s Department of Economic Development.

EDIC was formed in a merger of business units from Mubadala, Tawazun, and Emirates Advanced Industries in December. The merger “creates significant opportunities for industry growth”, Mr Al Mansoori said.

It means that “the domestic defence industry will produce increasing numbers of state- of-the-art products for export, which will boost the country’s manufacturing and skills base”.

Sixteen business units, including the Advanced Military Maintenance, Repair and Overhaul Centre, previously owned by Mubadala, and Caracal Light Ammunition, previously owned by Tawazun, will form part of the new entity.

Many of these units have benefited from offset agreements with international arms companies, in which expertise and skills were provided by manufacturers like Boeing, Lockheed Martin and Airbus.

Strata, a Mubadala company, was awarded contracts for the assembly of Airbus parts as part of offset agreements.

Homaid Al Shemmari, the head of Mubadala Aerospace, talked of transforming Al Ain, where Strata is based, into “the Seattle or Toulouse” of the Middle East, in reference to homes of Boeing and Airbus.

Boeing signed a similar agreement in 2011 with Tawazun Precision Industries, now part of EDIC.

The UAE’s growth comes mainly from adding labour and capital to the country’s economy, not from gains in productivity, economists have argued. This means that the UAE grows by adding more people and companies, rather than through technological change and improving skills.

The result is that UAE’s export-oriented industries make relatively unsophisticated products, said Hamed Al Hashemi, director of planning at the Abu Dhabi Department of Economic Development, at a talk last October.

But investment in defence industries, which vary in complexity from the assembly of engines to the design of satellites, should increase the “sophistication” of the country’s manufacturing output, said Mr Al Mansoori.

Mr Khan said: “It’s about capacity-building: the government is focusing on developing military support services, and building research and development capacity.”

Local defence companies also benefit from the UAE’s significant investments in state champions in aviation and aluminium.

Etihad Airways’ purchase of Abu Dhabi Aircraft Technologies, a maintenance, repair and overhaul company, from Mubadala Aerospace last May, illustrates the scope for synergies between the government’s military and civilian development spending, Mr Khan said.

Offset agreements, which are legal requirements for defence companies to contribute to the local economy, are another important part of the UAE’s procurement policy.

The government’s Offset Program Bureau (OPB) explained that defence contracts are rated in terms of their contribution to the local economy, either through technology transfers, or the establishment of joint ventures with local companies.

Defence contractors that increase employment for UAE nationals and increase skills and capacity in key industries are preferred, according to guidance published by the bureau.

The OPB credits its offset policy with having created “thousands of job opportunities for UAE nationals in knowledge-intensive and value-added projects, speeding up the transfer of technology and providing expertise through various joint ventures with foreign investors”.

Mr Khan says the offset programme has been successful. “A lot of these companies started as joint ventures as part of offset agreements, but are now developing into strong sustainable businesses,” he adds.

Mr Al Mansoori said: “[Offsets] have contributed to significant growth in the domestic defence sector in the fields of shipbuilding, systems integration, naval logistics and MRO activities.”

Regional political instability, and the UAE’s increasingly assertive role on the world stage, have further boosted defence spending. Recent military strikes against extremists in Syria have also underlined the UAE’s willingness to deploy hard power in the region.

While a low oil price may threaten revenues in the short term, the government has repeatedly expressed its determination to maintain levels of spending – including defence expenditures. GCC defence spending accounts for 83 per cent of total Middle East military spending, according to the research company IHS Jane’s .

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