Industry

Operation Protect

Defense Industry

As a defense market, Saudi Arabia remains one of the world's strongest and fastest growing; however, key appointments and developments have invigorated the Kingdom's longstanding mission of domestic military industrialization and strengthening the local supply chain.

In terms of purchasing power, Saudi Arabia and some of its Gulf neighbors have been among the world’s largest spenders in recent years. In 2014, Saudi Arabia spent roughly 10% of its GDP on defense, good enough to lead the region in percentage of GDP, surpassing India as the largest importer of defense equipment to take 3rd place globally, as well as ranking 7th in the world for total defense spending. Last year also witnessed Saudi Arabia becoming US’s top defense trading partner. According to the IHS annual Global Defence Trade Report, this dramatic trend is far from over. Saudi Arabia increased its imports spending by 54% from 2013 to 2014, and an additional YoY increase of 52% is projected for 2015, or a total of $9.8 billion. Potentially, the Middle East could become a $110 billion import market over the next decade. However, the Kingdom has also set its sights expanding the capabilities of its local supply chain and defense industry. Complete self-sufficiency, of course, still remains an unfeasible goal, at least for the foreseeable future, but due to Saudi Arabia’s financial resources, close relations with Washington DC and leading defense firms on either side of the Atlantic, the Kingdom has made some dramatic industrial leaps. As one of the US’s longest and stoutest allies in the region, Uncle Sam has understood that its own regional strategic goals would be greatly aided by the development of the Kingdom’s local defense industry. Beyond being a major supplier of military equipment to Saudi Arabia, the US has also greatly contributed in crucial technology and know-how transfer via such initiatives as the Economic Offset Program.

Perhaps the clearest example of Riyadh’s emphasis on its military industrialization in 2015 is the appointment of former SABIC CEO Mohamed Al Mady to head the Military Industries Company (MIC). The MIC is the government entity charged with, among other things, “actively developing the Kingdom’s military factories to accommodate advanced military manufacturing, in order to satisfy the needs of the military sector and to contribute to developing the nation’s military base through technology transfer.”

Al Mady, who was appointed via Royal Decree from HRH King Salman in February, worked with SABIC for nearly four decades, starting from when it was merely a five person operation to the 40,000-employee, $76-billion market cap giant it is today. His expertise and leadership—demonstrated by his guidance of SABIC’s transformation toward becoming the world’s largest chemical manufacturer—is seen as a large boon for the domestic military industrialization of the country.

Also part of MIC’s mission is to aid the defense sector in attracting Saudi youth with job opportunities. Overall unemployment in Saudi Arabia remains in the double digits, with unemployment amongst Saudi youth even higher than the national average. Thus, the indigenous development of the defense sector is not only seen as a key strategic imperative from a security standpoint, it also figures to be quite valuable in two other major government initiatives: diversifying the national economy and lowering unemployment rates for Saudi nationals.

In the private sector, some of the world’s largest defense companies are also renewing their commitment to the country and further contributing toward the industry’s localization and technology transfer. For example, the US’s Northrop Grumman, which has been dealing with the country for over four decades, recently designated the Kingdom as one of six “priority countries,” and will establish a 100% non-joint venture local presence. The company, through its already existing joint ventures in the country, already employ 1,700 people with 60% Saudization. BAE Systems, likewise, also recently designated Saudi Arabia as one of its regional hubs.

Domestic military industrialization has been Riyadh’s strategy for quite some time, but regional crises in 2014 and the first half of 2015 have heightened the urgency of the matter. With the Islamic State (IS)—which has made its designs on the Kingdom known to everyone—controlling large portions of Iraqi territory and with Saudi Arabia currently leading an Arab coalition air campaign against Shia Houthi rebels in Yemen, the country is facing serious security issues on both its northern and southern border.

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