Given recent news surrounding the Justice Against Sponsors of Terrorism Act and Saudi Arabia’s airstrikes on a funeral in Yemen, the Kingdom needs now more than ever to activate its own defense industry.
As the world’s second largest arms importer, the Kingdom of Saudi Arabia (KSA) plans to advance its military procurement strategy and grow a strong indigenous defense industry. Deputy Crown Prince Mohammad bin Salman’s Vision 2030 outlines the Saudis’ quest to increase ‘localization’ of military spending with Riyadh officials ambitiously seeking to source half of the Kingdom’s defense expenditures domestically by 2030.
The aim is to develop human capital, provide practical solutions and capabilities, drive technological advancements, and decrease KSA’s reliance on outside powers for its security – specifically armaments and high-tech solutions – amid exacerbating geopolitical instability in countries surrounding the Kingdom. In essence, Saudi officials conclude that a self-sufficient defense industry would contribute to both KSA’s national security and economic diversification beyond the country’s traditional hydrocarbon sector.
Since 2011, KSA has dramatically increased its annual defense spending, surpassing Russia’s last year to reach $87.2 billion. Yet due to KSA’s limited indigenous capabilities and internal counter-productive competition for authority and program representation, Riyadh sources 98 percent of its annual defense expenditures from foreign suppliers. Although KSA’s plans to ‘localize’ half of its arms purchases domestically within 13 years are unrealistic, the Saudis have the potential to make substantial progress in terms of the localization of military expenditures if Riyadh officials can devise a thorough and coherent strategy.
Political Considerations Towards a Saudi Defense Industry
Riyadh ultimately seeks to decrease the Kingdom’s dependence on foreign arms markets as part of KSA’s quest to assert itself as an independent Middle Eastern power with a prestigious military capable of countering forces ranging from Iran to Daesh and Yemen’s Houthi rebel movement. From Washington’s vantage point, Riyadh’s efforts to pursue military industrialization align with the Obama Administration’s vision of America’s Arab allies strengthening their armed forces’ capabilities and reaching local solutions for regional security crises.
At the same time, however, as Washington and Riyadh’s attitudes towards and reactions to Middle Eastern conflicts diverge, U.S. officials may perceive Saudi Arabia’s military industrialization as risky. Unquestionably, a likely by-product of KSA’s domestic defense industry might be a more confident, sectarian, and robust foreign policy which could significantly contribute to the region’s further destabilization and militarization.
To foreign defense contractors, the Kingdom is truly a gold mine. Spending more on arms imports than all other nations, save India, and with limited indigenous capabilities, KSA presents ample opportunity for not only short-term manufacturing gain but also long-term support and provision across the lifespan of vendor platforms (lasting over 30 years in some cases). International Traffic in Arms Regulations and the unofficial ‘Israeli Qualitative Military Edge’, however, limit sales to KSA. The reluctance of original equipment manufacturers (OEMs) to share the technological and trade secrets that are needed to build a domestic defense industry further magnifies these limitations.
Due to six important factors, the Kingdom had not promoted a coherent strategy to prioritize industry development and the transfer of technology for the growth of a Saudi defense industry until the announcement of Vision 2030.
First, KSA imports the majority of its military arsenal from the United States, Great Britain, and continental European countries, which, despite maintaining close relations with the Saudi rulers, are uncomfortable sharing intellectual property (IP), especially in light of growing tensions between Washington and Riyadh. This will only come under further scrutiny as Saudi Arabia will require more advanced technology to kick-start its own development, while the revolution of military affairs will advance technology and further polarizing capabilities.
Second, by emphasizing offsets and other trade-related multipliers within defense contracts, it can often cost the OEM to manufacture platforms and as a result makes a bid uncompetitive. It is common for OEMs to factor in the costs of offset obligations into their contracts so while the actual cost of a platform may be 100 percent, as a result of obligations the total contractual fee may cost the importing state 133 percent, an increasingly burdensome cost amid an era of low oil prices, budgetary shortfalls, and austerity. Furthermore, KSA and the entire Gulf Cooperation Council already have billions of unspent offset credit with OEMs being wasted due to an incoherent strategy.
Third, although KSA has on occasion required offset conditions, its predominant objective is security and as a result, often waivers these for U.S. contracts. Beyond the Peace Shield I & II and Al-Yamamah offset projects, the majority of such programs have invested in non-defense sectors. Riyadh has prioritized short-term security and capability absorption over economic efficiency and development.
Fourth, KSA’s offset entity, Economic Offset Program, has heavily prioritized the growth of Maintenance, Repair and Overhaul (MRO) capabilities with their predominant projects occurring in the 1980s and 1990s. However, there has been hardly any emphasis on manufacturing. The pillars of current Saudi Defense, Advanced Electronics Company, Alsalam Aircraft Company, and Middle East Propulsion Company, were born as a result of the first Peace Shield offset program in 1984. State-led development within this sector has lacked ambition while KSA’s small private defense sector has had limited impact.
Fifth, KSA’s patrimonial dimension to business culture cripples progress, promotes corruption and contributes to ‘islands of efficiency’ which, depending on the connection and relationship to a higher dimension of power at any given moment, dictate funding and contracts. Competition between related government departments, including the Ministry of Defense, Ministry of Interior, Ministry of Economic Planning, Saudi Arabian National Guard, Council for Economic and Developmental Affairs, and Council for Political and Security Affairs, and a wide range of State Owned Enterprises and public companies has stifled the development of a Saudi defense sector.
Finally, the Saudis must enable a strong ecosystem surrounding the development of a domestic military industry to empower continued growth within KSA. This must connect and forge strong partnerships between government institutions, the Saudi armed forces, external contractors, and the Saudi education sector. Basic cooperation partnerships do exist within KSA, albeit with limited results. The stand out Saudi entity, however, is the Prince Sultan Advanced Technology Research Institute at the King Abdullah City for Science and Technology (KACST). Technological successes have more commonly resulted from a partnership with foreign (not Saudi-led) OEM involvement.
Resulting from the absence of developed institutions and trained Saudi personnel, KSA’s nascent defense industry suffers from a lack of institutional partnership. In other words, knowledge transfer and maintenance are missing. Thus, the failure to emphasize the growth of a Saudi defense industry until the Vision 2030 announcement makes the target of 50 percent procurement from Saudi-based companies within 13 years a probable mirage. Technological limitations and a population lacking the necessary skills will certainly undermine the Kingdom’s plans for reducing external military spending as Vision 2030 sets forth.
A practical example of this was 2007 when Riyadh agreed to purchase 72 Eurofighter Typhoon aircraft, with a proposed 50 manufactured within KSA. Due to the lack of qualified personnel, Great Britain fulfilled the Kingdom’s commitment to build the 50 jets.
Given that most Saudis prefer to not work in service sector jobs, which usually pay less, the localization of Saudi arms purchases will require the Kingdom to address cultural issues which will likely challenge the Saudi leadership to achieve other goals laid out in Vision 2030.
What are the Solutions?
For the successful growth of a Saudi defense industry the state has to lead its expansion. State institutions have to work hand in hand with the education and private sectors while also successfully enticing partnerships with foreign nations. The aim is to retain and exploit the transfer of technology to promote and cultivate the development of technology by Saudi-owned companies.
Riyadh has emphasized that the localization of defense spending could only occur with “direct investments and strategic partnership with leading companies” in the industry. Firms such as BAE Systems, Boeing, General Electric, Raytheon, and Rolls-Royce have all shown a substantial effort to complement and contribute to capabilities within the Kingdom, albeit under the guidance of the Saudi authorities, and as a commercial strategy to win favor to secure further contracts.
Previously lacking a unified strategy, the Saudis may now pursue numerous commercially driven entities that will compete through contractual agreements and representation within the Saudi market. Institutions such as Saudi Technology Development and Investment Company and Military Industries Corporation (MIC), however, are non-offset related Saudi institutions that have previously looked to foster capabilities. Deputy Crown Prince Mohammed bin Salman’s appointment of Mohammed al-Mady, formerly head of Saudi Arabia Basic Industries Corporation to the head of MIC, highlighted the intent for MIC to be the leader in the growth of a Saudi defense industry. It is crucial for MIC to work closely with the Saudi education and private sectors. Development has to overrule principles of patrimonial linkages and prove to be a greater enabler for the benefit of a stronger indigenous defense industry in KSA.
Despite the challenges, the Saudis have achieved greater self-sufficiency in limited areas such as spare parts, munitions, and MRO. If KSA could follow the United Arab Emirate’s lead by prioritizing commonly used equipment and services, it would greatly reduce operating costs and enable the armed forces to undertake their primary mission.
Since the announcement of Vision 2030 Riyadh has already made a number of significant statements regarding the expansion of its defense industry. Rheinmetall Denel Munition opened a munitions factory, completed assembly of the Antonov AN-132 light multipurpose aircraft – a joint venture between Antonov and KACST, and the agreements with U.S. DigitalGlobe, and Turkish Aselsan to manufacture satellites and radars, respectively.
It is only through the development of manufacturing capabilities and the full-scale production of platforms that KSA can successfully contribute a significant portion of its defense expenditure to locally based firms; munitions and MRO alone will not provide 50 percent of its yearly military expenditure.
Clearly, without the import or transfer of technology KSA will not be able to advance its own defense industry, especially not one that it can rely on to provide the equipment capable of defending itself. So, how will KSA import the required technology for a defense industry and will it prioritize this over the short-term security of the state?
There will need to be a dual track approach to the augmentation of KSA’s defense industry; import high tech weaponry from predominantly Western nations, while also absorbing and developing technology from second and third tier nations with a successful track record of IP transference. This suggests that for the Kingdom to build a capable defense industry, it must cultivate and acquire industrial and educational capabilities through strong relationships with the wider industrial, commercial and public sectors.
Given the cultural obstacles and the absence of a giant indigenous defense industry, expectations about localization of military purchasing must be realistic. For the Saudis to achieve greater self-sufficiency as a military power, officials in Riyadh must make major investments in education and training while taking advantage of alliances with foreign powers capable of providing such consultation and expertise. Although this is possible, it is probable that such an effort will require decades, not years, to prove successful. The idea that the Kingdom will be independent of Western arms manufacturers is far off and thus political disputes over weapons sales will remain perennial.
Dr. Theodore Karasik is an Adjunct Senior Fellow at the Lexington Institute, Giorgio Cafiero is the CEO and Founder, and Matthew Hedges is an Advisor to Gulf State Analytics in Washington, D.C.