UAE and Saudi Arabia race to develop defence industries

Hamad Al Kaabi/UAE Presidential Court/via Reuters

• Governments aim to build skills and reduce need to buy foreign arms
• Saudi Arabia’s defence budget for 2022 equated to 7.4% of GDP
• UAE military awarded $6.4bn of contracts to local firms at Idex show

Saudi Arabia and the UAE are spending big to develop homegrown defence industries.

The two governments aim to reduce their reliance on foreign arms and equipment manufacturers by partnering with some of their own top suppliers to nurture local expertise and capabilities.

Relative to the size of their economies, Middle Eastern countries are among the largest military spenders, according to the Stockholm International Peace Research Institute.

Saudi’s 2022 defence budget equates to 7.4 percent of its GDP and was second only to Ukraine by this measure. Qatar (7 percent), Oman (5.2 percent), Jordan (4.8 percent) and Kuwait (4.5 percent) also made the top 10.

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Yet almost all this money is spent on foreign-made supplies; only 1 percent of Middle East and North Africa defence spending goes to homegrown research and development, estimates the International Institute for Strategic Studies (IISS).

That compares with about 4 percent among European and Asian nations and 15-20 percent in the US.

Fenella McGerty, an IISS senior fellow for defence economics, told AGBI a target of 4 percent was arguably the minimum required to “either develop the industrial base, ensure domestic capabilities are fit for future requirements and threats, or bolster competitiveness of defence materiel on the export market”.

Saudi Arabia, which was the world’s fifth biggest military spender in 2022, aims to increase research and development to 4 percent of its defence budget by 2030, from 0.2 percent in 2021, according to the IISS.

“Developing a full-spectrum defence industrial base is incredibly expensive and takes decades to establish,” said McGerty. Only the US has that full capability, she added, followed by Russia and China at varying degrees of scope and quality.

“Saudi Arabia has been using its scale to push for higher levels of local content in its purchases,” said Rahul Shah, head of corporate and thematic research at Tellimer in Dubai. 

“This ties in with its goal of creating more high-skilled jobs for its rapidly growing local workforce.

“Israel and Turkey show that internationally competitive indigenous companies can emerge, but typically this takes time. Encouraging international suppliers to onshore some of the manufacturing process can help kick-start a local talent and expertise ecosystem.”

The UAE’s defence industry is focused on manufacturing armoured vehicles, military drones, shipbuilding, missiles and munitions, and cyber and electronic warfare, said McGerty.

Saudi companies have the capability to produce, develop or maintain drones, ships, armoured vehicles, small arms, ammunition and munitions.

Reuters/Umit Bektas

Offsets lead to local investment

As part of major arms and military equipment purchases, buyers will demand so-called offsets in which the sellers must invest in local, usually defence-oriented initiatives.

The UAE’s offset scheme falls under the Tawazun Council’s economic programme. Its rules were recently relaxed, allowing investments into industries such as infrastructure and technology, which gives the country a potential advantage, McGerty said.

“Saudi Arabia is focusing on the human capital and education aspect with greater intensity in recognition that skilled labour in these fields is difficult to attract and longer to develop,” she said.

“Both policies face the difficulty that without major procurement programmes, the ability to leverage the corresponding offset projects into the respective defence industrial base is effectively stymied.”

Saudi and the UAE’s ambitions to develop defence industries stem from supply concerns, said McGerty.

“Over the past decade, some supplier countries have blocked the sale of defence equipment, consumables and subsystems required to operate platforms, bringing the need for an improved domestic defence industrial base into focus,” she added.

Reuters/Amr Alfiky

Idex defence show localisation

At the defence exhibition Idex, held in Abu Dhabi in February, the UAE military awarded contracts worth $6.4 billion, three-quarters of which went to local companies, according to an April report by the Gulf International Forum. That compares with 35 percent at the previous edition of Idex in 2021, the forum wrote.

Subsidiaries of Abu Dhabi government-owned defence conglomerate Edge received $4 billion of this year’s contracts.

Halcon signed contracts worth around $2.2 billion to supply weapons while another unit, Earth, will build a $1.1 billion communications and data network, and Adasi will supply $362 million of high-tech munitions.

Abu Dhabi duo Trust International Group and International Gold Group also won contracts.

Many of these entities began as joint ventures with Western defence manufacturers as part of the UAE’s offset programme, the forum added. It pointed to Abu Dhabi Ship Building (ADSB), which was launched by US weapons maker Northrop Grumman and is now owned by Edge.

“Edge’s training and localisation efforts continue at a quick pace, and the company is gradually becoming more competitive as an international exporter,” researcher Albert Vidal wrote in the forum’s report.

Last November ADSB signed a contract to build various vessels for Indonesia, while at Idex it inked a deal to co-supply Angola’s navy with several ships.

“Despite the appearance of rapid progress in localisation, many Emirati defence companies that signed contracts still rely heavily on multinational defence companies to manufacture their products and provide services,” wrote Vidal.

“While these deals signed by domestic companies are presented as fulfilling localisation goals, the actual production processes often involve subcontracting large portions to non-Emirati companies.”

The UAE will increasingly be able to produce more sophisticated military products, said Vidal, predicting that Edge will expand arms exports to Asia and Latin America.

“Ultimately, the degree of subcontracting and reliance on multinational defence companies will determine the true extent of the Emirati defence industry’s success,” he said.