PRIVATE & CONFIDENTIAL
Implications for the Global Defense Industry on the eve of IDEX and NAVDEX
Middle East and North Africa Defense Markets
February 18, 2015
Prepared for:
Participants of the Avascent and NDIA Webinar
PRIVATE & CONFIDENTIAL | AVASCENT | 2
Panel Participants
Amb. Patrick TherosPresident, US-Qatar Business Council• Avascent International Advisor• General Partner, Theros & Theros, LLP• Thirty-five year career at US Dept. of State
– Ambassador to Qatar– Political Advisor to US Central Command– Served in Syria, Jordan, and UAE
• Board of Directors, Middle East Policy Council
Jon BarneyManaging Director, Avascent• Fifteen years of experience in strategy in the
global A&D sector• Focus on Avascent’s Global Expansion and
M&A efforts• Former Naval Officer, NATO Fellow; MBA
Harvard, B.S. Honors Naval Academy
Aleksandar D. JovovicPrincipal, Avascent• Twelve years of experience in the A&D sector
and consulting• Expertise in defense systems, global markets,
and international political risk• Positions at Brookings and Georgetown
University; M.A. SAIS-JHU
Avascent expresses its appreciation to the National Defense Industrial Association (NDIA) for co-hosting this event
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Through 2020, the Middle East and North Africa defense sector boasts nearly $100B of addressable but unawarded spending, along with tens of billions of dollars in trailing services and sustainment support
Dramatic developments in the Middle East and North Africa (MENA)
region have put governments to the test, as they navigate the
complexity of leadership transitions, the rise of ISIS, failed states on
their periphery, and the economic consequences of low oil prices
Government revenue and defense spending in MENA are closely tied to
energy prices, particularly in the Gulf, but while an extended downturn
will put pressure on defense spending, the exacting security situation
and robust reserves ensure current defense coffers are amply funded
Through 2020, Avascent projects $278 billion in defense investment
among MENA’s leading defense spenders: KSA, UAE, Qatar, Iraq,
Algeria and others
Over a third of these funds remains uncommitted to specific providers
and/or programs making the region highly attractive to global defense
and aerospace firms, though partnering and offsets, as well as
competitive intensity, remain a challenge sector-wide
Combat aircraft, air and missile defense, ground and maritime assets,
C4ISR, and unmanned capabilities, as well as trailing support and
services are among leading requirements across the region
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The Middle East and North Africa are not unaccustomed to political and security tumult, but the region has experienced an unusually high volume of change in the recent period
Libya ImplodesAny semblance of
normalcy disappears as factions dismember last
vestiges of unified country
Syrian StalemateThe Syrian conflict appears to be in a
stalemate as moderate forces battle Assad’s
military and ISIS fighters
Detente w/WestHobbled by drastic
declines in oil revenue, Tehran considers coming to a political and security
understanding on nuclear
Oil PlummetsOil loses 50% or more of its value driving many Gulf countries into deficits; GCC countries still hold the energy reigns though
ISIS Digs InISIS makes major inroads in Iraq, disrupting the country’s recovery; despite intervention it is hard to dislodge
Saudi SuccessionThe accession of King
Salman of Saudi Arabia occurs at a particularly tense time in the Gulf
Egypt StabilizesAscendance of Gen. Abdel Fattah el-Sisi to the civilian presidency solidifies secular regime and military’s influence
Yemen CollapsesHouthi rebels now control a large portion of the country, including its seat of power challenging regional interests
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In 2020, annual MENA defense spending is expected to hit nearly $200 billion, with roughly one third destined for defense investment and O&M each—as long as oil & gas prices recover in the medium term
$-
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
2015 2016 2017 2018 2019 2020
Bill
ion
s
Jordan
Morocco
Egypt
Qatar
Kuwait
Oman
Algeria
Iraq
UAE
Saudi Arabia
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Procurement
Research & Development
Non-MOD Support
Operations & Maintenance
Personnel
Equipment Relevant Services Relevant
Defense Investment = Procurement + R&D
Note: Captures only formal Egyptian defense spending; the country’s Ministry of Defense and armed forces have a significant stake in the civilian economy, with most funding believed to support Personnel accounts
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$-
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
2016 2017 2018 2019 2020
$33 $31
$28
$23
$18
$4 $6
$6
$6
$7
$3 $4 $7
$13
$18
$5 $5 $5 $5 $5
Bill
ion
sBetween 2016-20, Avascent projects nearly $100 billion in uncommitted and industry-addressable defense equipment and systems opportunities across MENA’s top markets
UnaddressableDefense investment spending directly earmarked for government agencies or other entities
Projected White Space
Funding available for future projects: highly shapeable for industry within the confines of countries’ defense context
Projected Opportunity
Yet to be defined opportunities whose major requirements are emerging according to Avascent analysis
Stated Opportunity
Stated defense requirements or programs that have yet to be awarded: near term industry opportunities
Contract Awarded
Programs that are ongoing: prime or integrator typically selected, but sub & partnering opportunities may exist
Industry Addressability
Even in the “Contract Awarded” segment, opportunities to sub, partner, or perhaps displace a competitor, may exist working with both foreign and indigenous primes or major systems integrators
Limited High
Legend:
Note: This and subsequent slides evaluate defense investment spending in the following addressable markets: Morocco, Algeria, Egypt, Jordan, Oman, Qatar, UAE, Saudi Arabia, Iraq, and Kuwait
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Large Western OEM/integrators capture roughly half the market, but there is a large group of mid-tier firms that book hundreds of millions annually in the region; services and MRO are additive
Note: “Other” includes over 180 local, regional, and global integrators and OEMs, both private and public sector; also includes JVs, partnerships and other ventures that operate independently of their parent firms, US Government EDA transfers, as well as unknown/undefined primes; if this query is conducted at the major sub-contract level, the share of the top dozen firms diminishes significantly while the composition of the firms stays roughly the same. Source: Avascent Analytics
Snapshot of the Aggregate Competitive Landscape 2012-14(Prime View - Defense Equipment Spending Only)
While the largest global firms have a solid foothold in the region, local, regional and emerging prime contractors and integrators have an increasingly notable presence
$113BOther
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$-
$5
$10
$15
$20
$25
Platforms Weapons C4I Sensors EW/IW Other
Bill
ion
s
2012
2013
2014
Unsurprisingly, vehicle, ship and aircraft platforms, structures, and engines comprise the largest segment of MENA’s defense hardware spending, but this sector captures less than half of the addressable market
Note: The “Platforms” category includes structures, hulls, propulsion, power, engines, armor, integration and other elementsSource: Avascent Analytics
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Successfully addressing MENA’s defense markets requires not only a sound understanding of its programs and projects, but also a strong grasp of its mission-based underpinnings
Defense Investment Spending Forecast by Mission Area2015-2020
* Note: “Other Missions” includes Undersea Warfare, Amphibious Assault, Information Dominance, Military Space Operations & Control, as well as equipment that has multiple or undefined missions; Unattributed Spending captures existing white spaceSource: Avascent Analytics
Land Combat
Air Warfare
Air & Missile Defense
Unattributed Spending
Naval Warfare
Mobility & Lift
Ground Attack & Strategic Deterrence
ISR
Homeland Defense
Other Missions
$278B
Land Combat investment continues to dominate the sector at a time when air and naval power are ascendant in other regions
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Total Offset Obligations in Kuwait, UAE, and Saudi Arabia Incurred between 2012-14 = $24.5B (est.)
Kuwait - $0.6B
UAE - $4.2B
Saudi Arabia - $8.9B
US Obligors $13.7B
European Obligors
$4.5B
Other Obligors
$6.4B
$0.1B - Kuwait
$2.1B - UAE
$2.3B - Saudi Arabia
Offset obligations incurred by foreign defense companies within the Middle East’s three biggest defense markets are estimated to total over $24 billion in just the past three years
Note: Oman has recently established an offset policy, but did not have any notable obligations outstanding in this 3 year period; “Other” includes Russian, Canadian, Chinese Pakistani, South African & other providersSource: Avascent Analytics
US Obligations by Country
European Obligationsby Country
Despite greater emphasis on obligation retirement, the robust pace of accrual coupled with the complexities of retirement drive a relentless accumulation of obligations for foreign OEMs
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Saudi Arabia is the unquestioned military leader of the Gulf Cooperation Council, but its leadership has been rattled by developments in Iraq and Yemen
Sources: Avascent Analytics, Avascent Analysis, International Monetary Fund, World Economic Outlook DatabaseNote: Defense Investment funding shown above captures Procurement, R&D, and any additional acquisition or industry-accessible equipment budgets
Relevant Developments
Royal transition at a critical geo-strategic juncture
Taking leadership role among GCC regarding Syria, Iran, and Egypt
Facing increasing challenges along Iraqi and Yemeni border
Uncertainly about West-Iran talks
US$
bill
ion
s
Saudi Arabia
De
fen
se
Tren
ds
Cap
abili
ty N
eed
s
Massive modernization & recapitalization of air combat
assets
Continued focus on missile defense
capability in response to Iran
Longtime interest but slow
movement in growth of
maritime assets
Ground Tactical and Combat
VehiclesC4ISR & Cyber Unmanned
Assets
Surface and Undersea
Maritime AssetsMissile Defense
$600
$620
$640
$660
$680
$700
$720
$740
$760
$780
$800
$-
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Defense Investment GDP (right axis)
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The Emirates are undertaking an unprecedented military modernization, while considering a major consolidation of their indigenous defense capabilities
Sources: Avascent Analytics, Avascent Analysis, International Monetary Fund, World Economic Outlook Database Note: Defense Investment funding shown above captures Procurement, R&D, and any additional acquisition or industry-accessible equipment budgets
Relevant Developments
Outsized defense spending continues in face of Iranian challenge
Assertive military stance across the region, including against ISIS
Growing presence on economic and regional diplomatic front
US$
bill
ion
s
United Arab Emirates
De
fen
se
Tren
ds
Cap
abili
ty N
eed
s
Ongoing fighter procurement
seemingly stalled
Major investments in missile and air
defense in response to Iran
Push to develop indigenous
defense industry with support of
offsets
Air and Missile Defense
Maritime AssetsGround Tactical
and Combat Assets
C4ISR & CyberUnmanned
Assets
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
$-
$1
$2
$3
$4
$5
$6
$7
$8
$9
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Defense Investment GDP (right axis)
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Mirroring its vast per capita wealth, Qatar is investing in large-scale & sophisticated defense capabilities; Egypt, long a market dominated by US FMF, looks elsewhere, while Kuwait’s spending is likely to grow
De
fen
se
Inve
stm
ents
Cap
abili
ty N
eed
s
Note: Defense Investment funding shown above captures Procurement, R&D, and any additional acquisition or industry-accessible equipment budgets; only formal Egyptian budget shown here.Source: Avascent Analytics, Avascent Analysis, International Monetary Fund, World Economic Outlook Database;
Egypt
US$
bill
ion
s
• Fighter jets, fast missile craft, anti-ship missiles, and M1A1 tanks on hold; Apache released
• Reliance on US FMF to continue, but significant turn to other providers such as France, Russia…
Combat Aircraft
Ground Tactical and Combat Vehicles
Rotorcraft
C4ISR
$-
$100
$200
$300
$400
$500
$600
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Kuwait
US$
bill
ion
s
• Uptick in defense procurement after years of lower spending
• Major investments in additional US Patriot AMD systems
• Fighter upgrade and subsequent replacement decisions on horizon
Air & Missile Defense
Combat Aircraft
Ground Tactical and Combat Vehicles
Coastal Defense
$140
$150
$160
$170
$180
$190
0.0
0.5
1.0
1.5
2.0
2.5
Qatar
US$
bill
ion
s
• At a time of turmoil with GCC neighbors, major spending increases including attack and utility rotorcraft, tankers and AEWC aircraft, and missile defense systems
Combat Aircraft
Maritime Assets
C4ISR & Cyber
Unmanned Assets
$-
$50
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$250
0.0
2.0
4.0
6.0
8.0
Defense Investment GDP (right axis)
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While KSA and UAE get the majority of attention, some of the smaller MENA markets have gathered momentum; Iraq’s defense investments focus squarely on ISIS threat
Iraq
US$
bill
ion
s
Oman
US$
bill
ion
s
Algeria
US$
bill
ion
s
• Major recapitalization of armed forces coincides with Coalition withdrawal from country; new ISIS threat radically changes dynamics
• Investments redirected to short-term COIN needs & foreign assist.
• Despite carefully balanced relationship with GCC and Iran, significant modernization afoot
• Contract for Eurofighter, F-16 upgrades, maritime patrol aircraft, frigates and coast patrol
• Notable growth in defense spending, largely focused on European and Russian equipment
• Investments in ground, air combat and coast defense
Combat Aircraft
Ground Tactical and Combat Vehicles
Border & Coastal Defense
Maritime Assets
COIN and Light Attack Aircraft
Coast Defense and Riverine Assets
Rotorcraft
Combat Aircraft
Air and Missile Defense
Ground Tactical and Combat Vehicles
Coastal Defense
Maritime Assets
De
fen
se
Inve
stm
ents
Cap
abili
ty N
eed
s
Note: Defense Investment funding shown above captures Procurement, R&D, and any additional acquisition or industry-accessible equipment budgets Source: Avascent Analytics, Avascent Analysis, International Monetary Fund, World Economic Outlook Database
$185 $190 $195 $200 $205 $210 $215 $220 $225
0.0
1.0
2.0
3.0
4.0
5.0
$-
$50
$100
$150
$200
$250
0.0
1.0
2.0
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4.0
5.0
$60
$65
$70
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0.0
1.0
2.0
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4.0
5.0
Defense Investment GDP (right axis)
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To effectively counter increasing uncertainly over the coming decade, MENA players will require a host of new and advanced capabilities—below are just some illustrative segments
Priority Capabilities Capability Description Top Potential Markets
Air and Missile Defense• Sophisticated systems aimed largely at countering air
and missile threats from Iran• US, European, but China & Russia in the mix
Ground Tactical and Combat Vehicles
• Combat, tactical and logistics vehicles are all in demand driven by geography and regional threats
• One of the few global bright spots for this segment
Airborne Combat• Most competitive fighter aircraft market globally• Largely a battle between US and European players• Major choices pending in UAE, Qatar, Kuwait, etc.
Maritime Assets• Massive build up of fleets to include ASW, mines,
though marquee programs in KSA slow-moving• Talk of undersea assets in KSA and UAE is a new twist
Unmanned Assets• Unmanned systems are in demand (to include UCAV),
with budding indigenous players emerging• US controls are loosened, suggesting more exports
Rotorcraft Assets• Logistics and attack requirements remain vital,
particularly as countries develop SOF and mobile forces; humanitarian uses also emerge
C4ISR• Situational awareness growing requirement as
regional players seek self-sufficiency from US • Cyber and networks increasingly interesting as well
MRO and Sustainment Services
• Effort to improve sustainment and MRO to increase operational readiness, historically a challenge in the region; many indigenous providers in the mix
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Taking the Next Step: Growing sales across MENA’s largest defense markets
MENA’s defense sector presents a host of opportunities for global
defense firms, with US and European industry particularly well-
positioned; a prolonged, multi-year, plunge in energy prices,
however, will have some consequences for defense spending
Making and maintaining major in-roads in MENA’s addressable
markets requires a strong understanding of the local and regional
dynamics fueling defense spending
Along with increasingly-demanding requirements, firms need to
carefully consider the competitive landscape, offsets and local
industrial participation demands, and export control restrictions
Increases in the airborne and maritime domains mirror similar
trends globally; almost unique at this time, land forces spending
will continue as well; MRO and services offerings including cyber
also present a growing set of opportunities
Perhaps more so than ever in recent history, the region is seeking
military and security self-sufficiency; achieving this in terms of
capabilities, often in conjunction with local partnerships, is key to
success in the region
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Avascent US1615 L Street, NW, Suite 1200Washington, DC 20036Tel: +1 202 452 6990www.avascent.com
Jon BarneyManaging Director
Alek JovovicPrincipal
We look forward to seeing many of you at IDEX; if you are attending and would like to further discuss these findings please contact us.