Defense Industry Eyes Growth in the Middle East
The U.S. military might be pivoting to Asia, but American defense contractors are focused squarely on the Middle East.
Nearly $100 billion in defense sales are up for grabs in the Middle East and North Africa through 2019, along with tens of billions of dollars in services and support contracts, according to new estimates by the consulting firm Avascent. The region's largest spenders are Saudi Arabia, the United Arab Emirates, Qatar, Iraq and Algeria.
Executives from the world’s top defense contractors will be taking the pulse of the market at theSpecial Operations Forces Exhibition and Conference May 5 in Amman, Jordan.
"SOFEX looks to be pretty active this year," said Theodore Karasik, director of research and consultancy at the Institute for Near East and Gulf Military Analysis, based in Dubai.
Every country in the Middle East is shopping for some type of military equipment, Karasik said during a conference call with analysts. Besides rockets and small arms, the most sought-after items at this year's show are mine-resistant armored trucks and special operations helicopters, he said. "Oshkosh is doing a great job selling their products in the region," Karasik said of the Wisconsin-based manufacturer of military trucks.
The Middle East is experiencing "monumental changes" as governments face both internal and external threats, he said. Officials in the region, meanwhile, see the United States becoming distracted and disinterested. Fear and uncertainty, Karasik said, are fueling the demand for weaponry.
The region is in a state of turmoil, he added, buffeted by regime change, leadership transitions, sectarian conflict and civil war.
The Middle East and North Africa markets are attractive to Western suppliers because governments there generally are open to contractors’ sales pitches before they settle on what equipment they want, said Aleksandar Jovovic, a senior associate at Avascent. "These governments tend to not write long RFIs or RFPs, they tend to look to industry for solutions," he said. "It's a 'shapeable' market where customers are looking to be educated on what's out there."
Top-line defense spending in the Middle East and North Africa, led by Saudi Arabia and the Emirates, will top $120 billion per year by 2016, with roughly one third destined for procurement of new weapons, he said.
Jovovic cautioned that weapons manufacturers have a limited window of time to score Middle East deals. The buildup will not go on indefinitely, especially if the price of oil comes down, he said. A drastic drop in oil prices would put the brakes on arms procurement, he said. And small countries, although wealthy, can only absorb so much equipment.
Patrick N. Theros, former U.S. ambassador and currently president and executive director of the U.S.-Qatar Business Council, said instability in the Middle East is here to stay. "The Arab Spring is not a short term event," he said during a conference call. Theros compared it to the European revolutions of 1848. It started out as a wave of rebellions that were crushed, but set off about 100 years of war, he said. "I don't know that it will take 100 years in the Middle East," but unrest will be lasting. "The Arab people no longer fear their governments. This will continue. This will be a rolling revolution," said Theros. Governments in the past worried about outside invasions or attacks whereas now the greater threat to their survival will be internal.
For U.S. weapons manufacturers, Saudi Arabia has been a promised land of sorts. Now the world’sfourth largest military spender, the kingdom has become a key customer for U.S. arms suppliers.
One of the Pentagon's top contractors, Northrop Grumman Corp., launched a new venture called Northrop Grumman Aviation Arabia, in partnership with local firms, to supply aviation support services in the Middle East. "We are looking for professionals to join the NGAA team in Saudi Arabia," says the company's website.
The United Arab Emirates, too, have been a prime customer for U.S. firms. They are a tough buyer, though, because they demand significant work share, or "offsets," as a condition of sale. That means arms sellers must invest in the country, generate jobs and share technology. Between 2011 and 2013, Western firms accumulated about $91 billion of offset obligations just with Saudi Arabia and the UAE, according to Avascent. The Emirates, with a population of just a million citizens, has built a domestic defense industry with at least 125 companies.
Karasik believes that the Emirates' next big prize might be the U.S. F-35 joint strike fighter. The UAE — already in possession of the most advanced F-16 fighter fleet outside the United States — stopped shopping for a new fighter because they are waiting for the F-35, he said. "They don't want any other aircraft unless it's fifth generation." Whether the United States will sell the F-35 to the UAE has been the subject of speculation. One potential impediment is that Israel is an F-35 buyer, and Congress might object to the sale of fighters to an Arab country in light of the U.S. commitment to maintain Israel's qualitative military edge.
UAE has an ambitious defense industrial agenda, Karasik noted. The Emirates want to become an arms exporter and a naval vessel maintenance powerhouse over the next five to 10 years, he said.
The nation also is eyeing investments in undersea weapons technology as a hedge against Iran’s submarine fleet.
Qatar’s military arsenal also is expanding rapidly. The smallest of the Gulf Cooperation Council nations, its population in a few years ballooned from 650,000 to 2.5 million. Just in the last year, Qatar announced at least $24 billion worth of defense deals, said Theros. U.S. and Italian firms were the principal beneficiaries. This is the largest military expenditure the country has made in its entire history, he said. Massive spending on military hardware reflects the belief that “if you don't have a large military, nobody in the region takes you seriously,” said Theros. Simmering tensions between Qatar and its Emirati and Saudi neighbors are not likely to subside.
Arms suppliers to Qatar face less pressure to provide offsets, he said. “I have seen no indication that Qataris want offsets. They don't see the UAE offset program as having been successful.” Qatar is in the market for systems integrators, said Theros. “They look for companies that can do integration of equipment from different parts of the world.”
Theros warns, however, that the road to riches in the Middle East arms sector can be strewn with obstacles. “The opportunities are there for companies that are prepared to invest a great deal of time and money building relationships and building credibility, especially in Qatar which is new to the defense procurement world.”
A potential advantage for U.S. firms is that countries in the region are becoming more concerned about transparency and corruption, and might prefer to do business with companies that are subject to the Foreign Corruption Practices Act. This might slow down the procurement process, he said, but will open the door for American companies to play the FCPA card.