Strong foundations: Focusing on building a new industry from the ground up

Over the past decade the emirate’s reputation as a centre for the security, aerospace and defence industry has grown rapidly, both within the Middle East and around the world. The government has played a key role in this expansion, in an effort to strengthen the UAE’s defence capabilities and as a means of boosting economic diversification. Indeed, the development of a domestic aerospace- and defence-focused manufacturing sector is considered to be a key component of the Abu Dhabi Economic Vision 2030, the emirate’s long-term development strategy. “Abu Dhabi’s aerospace and defence industry is thriving right now,” said Andrew Humphreys, vice-president for the Middle East of BAE Systems. “All the major international players are here, and increasingly we work alongside highly competent and competitive local companies.”

Oversight

A wide variety of government organisations are involved in regulating Abu Dhabi’s aerospace and defence industries. The General Civil Aviation Authority of the UAE, which was established in 1996, is responsible for ensuring that the aviation industry operates in line with international best practice.

In addition to overseeing the UAE’s air-navigation system and other safety-related operations, the authority has a mandate to facilitate the continued growth of the industry while also working to enhance environmental sustainability. Major players in the commercial aerospace segment include the state-owned investment firm Mubadala Development Company, which was established in 2002 and has been active in aerospace since 2006, and Abu Dhabi Airports (ADAC), which operates the emirate’s airports and oversees a number of related projects.

On the defence side, the UAE Armed Forces General Headquarters (GHQ) oversees military contracts. GHQ works closely with the UAE Offset Programme Bureau – which was renamed the Tawazun Economic Council (TEC) in mid-2012 – and is widely considered to be one of the primary driving forces behind growth in the sector over the past decade. Under the offset programme, which was established in 1992, international defence contractors doing business in Abu Dhabi are required to invest in local joint ventures, with the goal of encouraging knowledge transfer and supporting the balance of trade.

Establishing the right partnerships is central to the success of the programme, according to Thibaut Trancart, the country director for Thales. “For offset programmes to be successful, good local partnerships must be established. They should consist of the transfer of real technology, a sound business plan and allow mobility of manufactured products,” Trancart told OBG.

Finally, the Ministry of Interior, which was established in December 1971, is responsible for ensuring the UAE’s internal security. The organisation manages a handful of security-related institutions and programmes. Over the course of the past few decades, the ministry, in conjunction with the Abu Dhabi Police General Headquarters (ADP), has overseen the development of a professional police force. The ministry is considered to be a regional leader in the use of cutting-edge technology. The ADP has overseen the development of a number of key initiatives in recent years, including the deployment of one of the world’s first large-scale face recognition systems and an advanced digital access portal. The ADP offers a wide variety of services online, including payment of fines, security approvals for commercial projects, crime reporting, and a number of driving- and traffic-related services, among others. Other companies and public sector entities involved in the industry include the Critical Infrastructure and Coastal Protection Authority and the Defence Contractors Council, the latter of which was set up in 2011 with a mandate to facilitate communication between the private sector and TEC.

Aerospace & Aviation

The rapid expansion of Abu Dhabi’s aviation sector in recent years is closely linked to the rise of Etihad Airways, the emirate’s flag carrier. Since it was established in 2003, Etihad has capitalised on Abu Dhabi’s central location in the Gulf, spending considerable sums on new aircraft and technology to become one of the fastest-growing airlines in the world. At the Dubai Airshow in November 2013 the carrier announced firm orders totalling $67bn at list prices for 87 Airbus and 56 Boeing aircraft, with a further 56 options and purchase rights. The new aircraft will be powered by 127 General Electric (GE) Aviation, 115 Rolls-Royce and 52 CFM engines. In 2012 Etihad reported revenues of $4.8bn, up 17% from $4.1bn in 2011. Similarly, passenger numbers grew by 23% to 10.3m in 2012, up from 8.4m in 2011.

Mubadala’s move into the aerospace sector in 2006 was closely linked to the rapid growth of Etihad. The firm’s dedicated aerospace unit was formed with a long-term mandate to develop a fully integrated aviation industry in Abu Dhabi, including research and development, manufacturing, assembly, and maintenance, repair and overhaul (MRO) activities. It oversees a wide variety of aerospace-related subsidiaries, including Strata, which manufactures composite aerostructures for Boeing and Airbus, among other original equipment manufacturers (OEMs); the Advanced Military Maintenance Repair and Overhaul Centre ( AMMROC), which provides military MRO services in conjunction with Lockheed Martin and Sikorsky Aerospace; and Abu Dhabi Aircraft Technologies (ADAT), the region’s largest independent MRO and technical services provider, among others. Additionally, Mubadala has invested in a number of foreign aerospace firms, including Italy’s Piaggio Aero, which manufactures turboprop aircraft, and SR Technics, a Swiss MRO company.

ADAC, meanwhile, was formed by the government in 2006 to manage Abu Dhabi International Airport (ADIA), and since then has taken control of four additional airports in the emirate. The firm is currently overseeing the expansion of ADIA, a $3bn project that includes the construction of a new Midfield Terminal Building by TAV, a Turkish firm (see Transport chapter). A number of subsidiaries operate under ADAC, including Abu Dhabi Duty Free and the Gulf Centre for Aviation Studies, among others.

A Regional Centre

Mubadala and ADAC are in the process of jointly developing the Nibras Al Ain Aerospace Park (Nibras), which is expected to transform Al Ain, Abu Dhabi’s second-largest city, located some 160 km east of the capital. Under Plan Al Ain 2030 and Economic Vision 2030, Al Ain will be turned into a regional centre for the aviation and aerospace industry.

Development will be focused on Nibras, a 25-sq-km project that encompasses the existing Al Ain International Airport and a large surrounding greenfield area. In addition to offering companies 100% foreign ownership and a variety of other free zone benefits, the park is being designed to attract firms that cover all aspects of the supply chain.

Badr Al Olama, CEO of Strata, told OBG, “Abu Dhabi is well positioned to become a regional aerospace manufacturing hub given its low energy costs, abundance of base raw materials from sectors such as hydrocarbons, and a lean capital structure to finance OEMs. These factors will ultimately lead to an attractive production hub with low costs and comparable capabilities to Western manufacturers.”

A number of major local players have already set up shop in the park, including Strata; the Horizon International Flight Academy, a Mubadala subsidiary that provides helicopter and fixed-wing training for both military and civilian pilots; and the Al Ain International Aviation Academy at Abu Dhabi Polytechnic, which offers aircraft maintenance and air-traffic-control instruction under the umbrella of the Institute of Applied Technology, a state-operated technical education institution. AMMROC, the anchor tenant at Nibras, plans to move into a custom-built facility at the park by 2015. In addition to manufacturing and MRO activity, the long-term plan for Nibras includes a commercial spaceport, to be operated by Richard Branson’s Virgin Galactic, some 38% of which is owned by the Abu Dhabi-based firm Aabar Investments, a subsidiary of the state-owned International Petroleum Investment Company.

While most of the current work at Nibras is taking place under the general rubric of Plan Al Ain 2030, the blueprint for the development of the park itself stretches through 2060. Phase one, which is scheduled to run through 2016, includes the construction of much of the infrastructure for the park. During phase two, which is scheduled to run through the mid-2020s, Mubadala and ADAC will work to attract new companies and foreign investors, thereby jump-starting development in the area. If everything goes according to plan, by the end of phase three firms at the park are expected to employ more than 10,000 workers.

Solid Start

Strata, which was launched by Mubadala in 2009, is on the path to becoming a top-tier player in the global aerospace industry. At the company’s Al Ain plant, which began operations in 2010, Strata manufactures composite aerostructures for a number of OEMs, including Boeing, Airbus and Alenia Aermacchi.

In February 2013 a notable milestone was achieved when a fully-assembled aileron manufactured in the UAE by UAE nationals was fitted for the first time on an Etihad Airways A330 aircraft. Strata also manufactures a number of other composite parts for Airbus planes, including flap-track fairings for the A330, A340, A350 XWB and A380 aircraft.

During the 2013 Dubai Airshow, Airbus and Mubadala expanded their existing partnership whereby an additional $2.5bn was awarded to cover composite and metallic aerostructures in addition to the procurement of pre-preg materials to further enhance Mubadala’s global footprint. Under a 10-year contract announced in April 2012, Strata also secured the supply of Boeing 777 and 787 empennage ribs, as well as vertical fins for Boeing’s 787 Dreamliner. The deal is Boeing’s first direct supplier composites contract with a company based in the Arab world. Furthermore, Mubadala and Boeing also expanded their strategic partnership during Dubai Airshow 2013 to supply up to $2.5bn in composite and metallic aerostructures manufactured at Strata. As part of that deal Boeing will also support the establishment of pre-preg and carbon manufacturing capabilities in Abu Dhabi. Strata is also a supplier to major tier-one firms such as Austrian FACC and Belgian SABCA. As a major tenant at Nibras, Strata is supporting the local economy of Al Ain, providing training and employment opportunities to UAE nationals. Currently, over 35% of Strata’s workforce is made up of Emiratis, of which 80% are female. Through a comprehensive training programme, the firm is on track to reach its objective of increasing the number of Emirati employees to 50% in the coming two years.

Current Emphasis

In the meantime, Mubadala and other existing local players are focusing on the MRO segment, which has been growing quickly in recent years. According to Aviation Week, an industry research and publishing firm, global MRO activity was expected to expand by 3.2% between 2012 and 2022, driven by a steadily increasing focus on outsourcing among major OEMs and airlines around the world. Demand for MRO services in the Middle East, in particular, has grown considerably of late, driven largely by the rapid expansion of Etihad and other regional airlines.

Mubadala’s commercial MRO network, which consists of ADAT, based in Abu Dhabi, and SR Technics, based in Zurich, offers a wide variety of services for most Airbus and Boeing aircraft. While the two companies operate separate networks, the fact that they are both owned by Mubadala has allowed them to jointly negotiate contracts. For example, in August 2013 ADAT and SR Technics signed a long-term joint agreement to expand MRO work with Moog, a US company that manufactures integrated systems and other critical components for a wide variety of aircraft, including Boeing’s 787 Dreamliner. At the same time, both MRO firms have continued to build their business on an independent basis as well. In June 2012, for example ADAT was awarded a seven-year contract to provide integrated component solutions for Ethiopian Airlines’ fleet of Boeing 737 aircraft.

New Deals

In a development contributing towards its goal of becoming a diversified global tier 1 aerospace supplier, Mubadala recently announced new agreements with Airbus, Boeing, GE Aviation, Rolls-Royce and the UAE Armed Forces. During the November 2013 Dubai Airshow, Mubadala secured more than Dh43bn ($11.7bn) worth of deals for the UAE’s aerospace and defence sector, including aerostructures and engine parts manufacturing work packages and composite materials production.

Mubadala also signed a deal with Rolls-Royce to establish Abu Dhabi as a key member of Rolls-Royce’s global network for maintenance and manufacturing activities, while the British engine maker will support Mubadala as it establishes itself as an approved Trent XWB engine MRO provider, becoming the first such facility in the Middle East. Rolls-Royce will also help set up the first advanced manufacturing research centre in the region and will source engine components valued at up to $500m over a 10-year period from Mubadala once it has a manufacturing capability.

In another agreement reached during the 2013 Dubai Airshow, Mubadala signed a joint venture with GE Aviation to further enhance the GE nx MRO relationship, including studies to explore opportunities such as the establishment of a regional GE nx logistics centre in Abu Dhabi and a direct investment by GE in the existing GE nx engine shop. In furtherance of its commitment to establish Abu Dhabi as a key member of its global supply chain ecosystem, GE Aviation will also work with Mubadala to develop engine component manufacturing capabilities within the emirate, with the aim of positioning Mubadala to become a tier 1 engine supplier in the next decade, and has committed $500m in work packages. During the air show, AMMROC was also able to extend its partnership with the UAE Armed Forces in a Dh21.14bn ($5.8bn), five-year performance-based logistics agreement.

Defence & Security

The expansion of Abu Dhabi’s defence industry in recent years is closely linked to an uptick in military spending in the UAE and elsewhere in the Middle East and North Africa. While most countries in the region do not report defence spending data, according to recent estimates and publicly available information, the UAE has expanded its military considerably in recent years, as have Saudi Arabia, Kuwait and Qatar. According to estimated data published by the Stockholm International Peace Research Institute (SIPRI), total military expenditure by Middle Eastern countries reached a decade high of $134bn in 2012, up 8.9% from $123bn the previous year, and up considerably on $112bn in 2009, $100bn in 2005 and $85.4bn in 2003. SIPRI puts the UAE’s defence spending at $19.2bn in 2011 – the most recent year for which an estimate is available – which was equal to 15.6% of total regional spend in the same period, and around 5.4% of the UAE’s GDP. This figure is up from $17.7bn in 2010, $14.1bn in 2009 and $12bn in 2008. While SIPRI’s numbers are estimates, the trend towards growth, both in the UAE and the region at large, is clear. According to Deloitte, while defence spending in the US, the UK and Europe is expected to decline through the end of 2013, increases are expected in China, Russia, India, Saudi Arabia, the UAE and Brazil.

Going Local

 “Over the past several years a number of government and semi-government-owned companies have been established as a means to develop a domestic defence industry. As a result, the sector players now find themselves facing more competition,” Marwan A M Al Hamar, chairman of Al Hamra, which specialises in defence, security, intelligence and counter-intelligence, told OBG.

Historically, the majority of the UAE’s military hardware and related equipment has been purchased from the world’s largest traditional suppliers, most of which are based in the US, the UK and Europe. As the country’s domestic industry has matured, however, a steadily increasing percentage of the UAE’s overall military expenditure has gone to local firms.

“The countries with the largest number of exhibitors at the 2013 International Defence Exhibition and Conference (IDEX), which took place in the emirate in February 2013, were the UAE, the US, Germany and Turkey,” said Alex Nicholl, the business development director at the Abu Dhabi National Exhibition Centre, which hosts the biennial conference, one of the largest defence industry events in the world (see analysis).

The growth of the local defence industry over the past decade is largely the result of TEC, which has overseen the establishment of more than 40 joint-venture companies under Abu Dhabi’s offset programme since it was set up in the early 1990s. The bulk of these firms fall under Tawazun Holding, a strategic investment company that was launched by TEC in 2007 with a mandate to “develop ventures through industrial partnerships … that add value to the UAE’s industrial manufacturing sector”, including defence and aerospace, munitions and technology. Many of the companies under Tawazun Holdings operate out of Tawazun Industrial Park, a full-service manufacturing and industrial development located just outside Abu Dhabi City, on the Abu Dhabi-Dubai highway.

The majority of local defence companies currently operating in Abu Dhabi are either direct subsidiaries of Tawazun or are related to the group in some way. Nimr Automotive, which is a joint venture between Tawazun (60%) and the shareholders of Emirates Defence Technology (EDT, 40%), a major local private conglomerate that oversees a number of defence-related concerns, produces multipurpose 4x4 and 6x6 armoured vehicles, which are the first pieces of military hardware to be built entirely in the UAE. In addition to the UAE Armed Forces, which, as of early 2013 had 1800 Nimr vehicles on order, the firm has sold vehicles to Jordan and Lebanon amongst others. In mid-2012 Tawazun announced it had signed an agreement with the Algerian Ministry of Defence to produce and sell Nimr vehicles in Algeria. Additionally, in May 2013 the company signed a cooperation agreement with FNSS Savunma Sistemleri, a Turkish company, to market – and potentially produce – Nimr vehicles in Turkey.

Burkan Munitions Systems, a joint venture between Tawazun and Al Jaber Trading Establishment Group, manufactures and tests various types of ordnance and ammunition. Caracal Light Ammunition (CLA), a fully owned Tawazun subsidiary, produces NATO-compatible bullets. In early 2013 CLA signed a five-year supply agreement with the US-based firm Century Arms, the largest importer of surplus firearms in North America. Caracal International, another Tawazun subsidiary, manufactures small arms and accessories for the military, law enforcement and sporting markets. In 2007 Caracel International acquired the German luxury sport shotgun and rifle manufacturer Merkel.

Other Tawazun-related firms include Tawazun Advanced Defence Systems, which produces long-range precision rifles in line with standards developed by Russia’s Tsar Cannon Group, which was acquired by Tawazun in the mid-2000s; Tawazun Precision Industries, which manufactures and services industrial components for military and aerospace firms; the Abu Dhabi Autonomous Systems Investments Company, which develops and manufactures autonomous vehicles for air, land and sea; and Tawazun Dynamics, a joint venture between Tawazun and Denel Dynamics, a South African government-owned firm, that designs and manufactures precision-guided air munitions systems.

Other Players

Abu Dhabi is also home to a number of defence companies that are not affiliated with Tawazun. AMMROC, which is jointly owned by Mubadala and the US firms Sikorsky Aircraft and Lockheed Martin, provides air frame, engine and component MRO services. As of early 2013 around 90% of AMMROC’s business came from the UAE Armed Forces. In 2012 AMMROC posted year-on-year growth of 75%, according to Homaid Abdullah Al Shemmari, the CEO of Mubadala’s aerospace and engineering services unit. A number of other Mubadala subsidiaries are also involved in the industry, including Al Taif Technical Services, an MRO services provider for military land vehicles, like armoured combat vehicles, tanks and ground support equipment, and the Al Yah Satellite Communications Company, a commercial satellite system that provides secure communications to the UAE military.

Competitors

 Al Fahad Group, which was founded in 2005, offers security equipment and installation services. The firm provides products and services in a wide variety of segments. In the areas of military and civil security, Al Fahad offers technology in support of monitoring and surveillance, counter-terrorism, criminology, airport and seaport security, bio-threat security and data security, among other things. Al Fahad is active in developing new security-related technologies for telecoms, power and utilities, finance, and construction and property management. For instance, in terms of telecoms, the firm is capable of providing encrypted fixed copper and fibre networks and a range of wireless technologies, including digital microwave and very-small-aperture terminal systems, the latter of which can provide voice and data communications links in remote areas. Over the past decade the company has become a major player in the emirate’s cyber security segment, which is widely considered to be a key growth driver in the industry as a whole (see analysis). Al Fahad also offers custom electronic counter measures, which protect against eavesdropping and unwanted monitoring. In terms of biotechnology, the firm has developed robot-driven warning systems and bio-security counter-threat training services.

In January 2012, Al Fahad also announced that it had been awarded a 1.5-MW photovoltaic solar panel installation project by the government of Abu Dhabi, which will be carried out in conjunction with Canadian Solar, one of the world’s largest solar energy companies. “There is a lot of opportunity for growth in security, defence and related fields in Abu Dhabi right now,” Khaled Obaid Al Othman Al Ali, CEO of Al Fahad, told OBG. “Digital surveillance and cyber security solutions are in demand right now, so we have been looking to these areas as well.”

EDT, which has been supplying the UAE Armed Forces for the past 40 years, is another major local developer of defence-related technologies. The firm was responsible for much of the initial design, engineering and prototyping work on the Nimr vehicle, before handing the project off to Tawazun. Since then EDT has developed a number of upgrade packages and systems for Nimr vehicles. Additional products offered by EDT include the WISENT 2 armoured vehicle, a tracked personnel carrier, with the German firm FFG, and a handful of other military and related vehicles. Many of these products are manufactured at EDT’s facility in Abu Dhabi, which also offers upgrades for existing vehicles.

In addition, EDT supplies the various branches of the UAE Armed Forces with a number of other military hardware and components, including a variety of light and heavy weapons systems; ballistic and blast armouring solutions and related products; life support systems; and tactical equipment for special operations and law enforcement. The company is a local distributor of military hardware made by a variety of foreign brands, such as the French firm Safran Sagem for navigation systems, Thales for optronics, Cassidian for radars, Lacroix for vehicle protection, Microsemi for screening solutions and Tatra Trucks for military trucks. EDT is also a major uniform manufacturer, providing uniforms to the UAE Armed Forces and Etihad Airways.

Major Actor

The International Golden Group (IGG), which is jointly owned by local conglomerate Emirates Advanced Investment and the South Africa-based Denel Group, provides a variety of security services for the UAE Armed Forces. IGG also partners with a number of other international companies, including the US-based firm General Dynamics and the European company Thales. Other private players involved in the defence industry in Abu Dhabi include the Bin Jabr group, which, in addition to its participation in Nimr Automotive, designs submersibles and military uniforms, and Advanced Integrated Systems, which develops critical infrastructure security systems.

“The UAE is perfectly capable of developing a defence industry which is not only reliant on national requirements, but can also tap into the export market. However, this is a bottom-up industry, meaning that an emphasis should at first be placed on establishing a solid research and development programme with the aim of producing basic, reliable products. Once you have established your reputation and credibility, over time you can then enhance the sophistication level of your goods and services,” Al Hamar told OBG.

According to Mohamed bin Jabr Al Suwaidi, CEO of Emirates Defence Technology, “The local defence and security industry has come a long way in a short period of time. With the government’s commitment to economic diversification, we anticipate the industry will play an even more significant role in terms of its contribution to the greater economy in the future.”

On The Water

 Over the past decade and a half Abu Dhabi has invested heavily in the shipbuilding industry, with a particular focus on supplying the UAE Navy. Taking into account the nation’s nearly 700 km of coastal waters and its location relative to the Strait of Hormuz, Abu Dhabi’s recent investments into naval technology are expected to continue to expand for the foreseeable future. The emirate’s shipbuilding industry is centred in Mussafah, an industrial area located just outside of Abu Dhabi City.

Established by the government in 1996, Abu Dhabi Ship Building’s (ADSB) original mandate was to repair and support UAE Navy vessels. Since then, however, the firm has grown considerably. As of early 2013 ADSB manufactured a wide range of military ships such as corvettes, patrol boats, interceptors, assault boats, and troop and supply vessels. The firm operates one of only a handful of shipyards in the Gulf capable of working to naval standards. ADSB is 10% owned by the Abu Dhabi government, 40% owned by Mubadala and 50% publicly traded on Abu Dhabi’s Securities Exchange. The company’s major clients are UAE government entities, such as the UAE Navy, the UAE Coast Guard, and the Critical Infrastructure and Coastal Protection Authority. At IDEX in 2013 the firm announced that it had won a contract to build eight new vessels for the Kuwaiti Naval Force. Other local shipbuilding firms include Al Fattan Ship Industry and Grandweld Shipyards.

Outlook

 While the security, aerospace and defence industry has grown rapidly in recent years, local players face a number of challenges. The expansion of the domestic manufacturing industry thus far has been closely aligned with public entities, including Tawazun and Mubadala, and the sector’s reliance on government-led investment raises some questions on sustainable, long-term growth. Other challenges include the high level of regional competition in many areas. In the commercial aviation segment, for example, Etihad, which has become a major global presence since it was launched in 2003, competes with Dubai-based Emirates, Qatar Airways and other regional carriers.

Despite these and other issues, most local defence and aviation firms expect to see continued expansion for years to come. “The UAE’s reputation for stability and security has resulted in it becoming an international tourism and investment hub,” Al Othman Al Ali told OBG. “This did not happen accidentally, but through proactive measures and decisions taken by the government to invest in state-of-the-art security-related equipment and technologies. Going forward, spending on security is likely to increase further as the country seeks to maintain its safe haven status within the region.” Indeed, by most counts demand for defence-related equipment and services is on the rise, both within the UAE and throughout the broader region.

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The Report: Abu Dhabi 2014

Security, Aerospace & Defence chapter from The Report: Abu Dhabi 2014

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