Denel turnaround plan: Will government and SANDF come to the rescue?

Denel has unveiled what it calls “far-reaching steps” to ensure the weapons manufacturer’s sustainability, saying that a streamlined and refocused Denel will be a sustainable business and return to profitability within the next five years through comprehensive restructuring.

“We are determined to turn Denel around and repurpose it while retaining the core capabilities required to meet South Africa’s strategic security requirements,” said William Hlakoane, interim group chief executive.

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Full government support required

A defence industry insider, who asked not to be named, said this was possible as Denel had good products and some new items in development that would have a good export market, but the planned turnaround would need full government support.

He said this would firstly mean that government must give the South African National Defence Force (SANDF) the funds required to buy the equipment it needs, such as the A-Darter missile, Badger infantry combat vehicle and ammunition, before throwing its full support behind exports and in particular, putting pressure on the National Conventional Arms Control Committee (NCACC) to process permits faster.

“Nobody will buy complex equipment with a 20-to-30-year service life from a country that does not support its own defence industry. South Africa must also become more realistic about foreign partners.

“The South African market is too small for Denel and the company is too small a player to really compete against the big international groups by itself. The export successes of Rheinmetall Denel Munition [RDM] and the Hensoldt companies in South Africa, for example, are mainly due to their links to major internationally active defence groups and not just the quality of their products.”

He added that given the catastrophic management meltdown at Denel under the previous board and top management, no major group would settle for less than 51%, which he did not consider an impossible demand as it had not stopped Australia, for instance, from developing a vibrant industry that was largely foreign-owned but brought in forex revenues, paid taxes, sourced material locally and employed Australians, exactly as RDM and Hensoldt did locally.

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Another bailout?

Hlakoane said Denel was encouraged by the unwavering support of its shareholder, the Department of Public Enterprises, which acknowledged that Denel needed financial help. Denel was also discussing its survival with the Department of Defence and the National Treasury.

Will this entail another bailout? The source said “probably”, based on the way government had mishandled things.

“However, in reality the only way to really save Denel would be to provide acquisition and upgrade funding to the SANDF so that it can buy equipment from Denel and have Denel upgrade existing equipment to generate immediate cash flow and meet SANDF requirements.”

He said this would give other countries a measure of confidence that SA would not allow Denel to sink, as well as the assurance that equipment could be supported, by virtue of the SANDF using it.

A simple bailout was pointless if the group had no orders and the SANDF could not order anything due to lack of funds. Exports were increasingly unlikely unless the country demonstrated its own confidence in Denel.

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Reducing operating divisions

Hlakoane explained that part of the plan included reducing Denel’s current operating divisions and subsidiaries from six to two.

One division would focus on engineering, while the other, which was Denel’s core business, focused on manufacturing and maintenance.

However, the expert does not think it is a good idea to lump precision weapons and artillery into the same division, for instance, when they require quite different skills.

Centralising finance was what got Denel into trouble in the first place, where profitable divisions saw their revenue swallowed by the head office and allocated to unprofitable ventures, leaving them short of working capital.

“Denel worked best when its main divisions, Dynamics, Land Systems, Aviation (as it then was) and PMP [Pretoria Metal Pressings] were self-accounting.”

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Denel’s reputation

According to Hlakoane, the maintenance and manufacturing division would build on Denel’s market reputation in the fields of aeronautics, unmanned aerial vehicle systems and the production of small and medium calibre ammunition as well as the production of combat vehicles.

However, does Denel still have a good reputation?

The expert said Denel had an excellent reputation for the quality of its equipment and the engineers who developed it, but not so great in respect of its management.

“The problems of the past few years have now undermined the reputation of the group as a company to deal with, which makes the quality of its products almost irrelevant.”

What made it even worse, he said, was that problems with export permits had made Denel, and in fact the wider local defence industry, look like an unreliable supplier.

This was something no country’s armed forces wanted to deal with.

“Consider the nonsense about end user certificate inspections, even affecting Oman which was and is not involved in any conflict and the loss of the major missile contract with Egypt as a result of foot dragging in obtaining guarantees,” he said.

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Selling off assets

Hlakoane said conservative estimates indicated that the sale of non-core or non-profit making assets would realise value of about R1.5 billion over the next five years as part of the plan. The expert said he did not know what they had in mind to sell.

“At one stage they were thinking of selling the Pretoria Metal Pressings foundry or even all of it, but I do not think the department of defence would allow that, as PMP is considered a strategic capability.”

Denel was also considering selling the Gear Ratio part of Denel Vehicle Systems, but that would leave the army without support for its combat vehicles, which almost all use Gear Ratio transmissions and also encounter opposition from the department.

“Perhaps there are properties that they could sell.”

Loss of skills

Has Denel not lost too many skills already?

The expert suspected that Dynamics had lost too many engineers to recover without help. He said the best solution would be probably be to approach a group such as Rheinmetall and say “we have great IP and projects but have lost our engineers; take a piece of the company and bring in engineers to pick up the reins and help train and develop our next generation”.

“Failing that I do hot hold out much hope for Dynamics. I do not think many of those who left would come back. They could have a year perhaps, but now they have settled into new companies and in some cases new countries and are unlikely to uproot themselves on the basis of promises by a government that demonstrably allowed Denel to be hijacked and run into the ground.”

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Can the unpaid Denel employees now look forward to better times at Denel?

“Not unless government does what I have outlined here.”