JUSTIN WASTNAGE / JOHANNESBURG AND PRETORIA
South Africa's aerospace industry emerged on the world stage when apartheid ended. How has it transformed from self-sufficiency to global player?
Next year marks the tenth anniversary of multiracial democracy in South Africa, which has won plaudits for the smooth transition to majority rule with minimal social upheaval.
The transformation of the country's aerospace sector from a self-sufficient single-customer market to a globally competitive industry has been slower, but there are signs that a solid foundation has now been laid for future growth.
Since its creation in 1964, Atlas Aircraft had been the assembly centre and maintenance provider for the South African Defence Force (SADF), via contracts issued by the government's procurement agency, the Armaments Corporation of South Africa (Armscor). During the 1960s and 1970s, Atlas manufactured the Dassault Mirage F1 jet fighter, Aerospatiale Alouette III light utility helicopter and Aermacchi Impala MB326 jet trainer under licence, although international co-operation was difficult for foreign firms, concerned about negative publicity. The comprehensive US Anti-Apartheid Act of 1986 killed off most remaining joint ventures.
Similarly, the 1977 UN mandatory arms embargo compelled Atlas towards almost total independence in aircraft manufacturing, from components to full assembly. During this period Atlas also moved towards its own clean-sheet designs, starting with a prototype for the All Composite Evaluator tandem trainer. During the early 1990s it attempted its most ambitious project, the CSH-2 Rooivalk attack helicopter. Many involved in the project, however, had recognised the change that was coming and the enormous business impact it would have.
New dawn
Dr Paul Potgieter was head of the Council of South African Aeronautical Research's helicopter programme that co-developed the Rooivalk with Atlas. "We could see the new South Africa coming and we thought that after R16 billion [$2 billion] investment, it would be a shame to lose the Rooivalk at such a late stage in its development," he says. "We knew the arms embargo would disappear and suppliers would come into the market. We felt the best way to respond was to restructure, shed overheads and look for export opportunities."
Export orders would also be needed as the government trimmed the defence budget. During the 1980s the SADF had cemented its place as the most powerful military machine on the African continent, with an undeclared war against Angola in 1982 and commando raids on Botswana, Swaziland and Zimbabwe among the campaigns ordered by former prime minister Pieter Willem Botha.
While many aerospace professionals were largely unaware of or aloof from politics, the growth of the SADF's capabilities had benefits for aerospace engineers. Christo Weder, managing director of Aircraft Monitoring Systems (AMS) recalls: "The mid-1980s was a period of inward focus, but also saw significant research and development for the SADF."
The South African government wanted First World armaments, so suppliers were given almost carte blanche to develop systems, usually with Armscor funding, he says. AMS was one of several companies that benefited from this policy and was able to adapt to the changing landscape quicker than Atlas.
Time for reform
The reform of Atlas was hampered by its strong links with Armscor. "It was difficult to gear up when our customer was going in the opposite direction," says Potgieter. "If they didn't want to apply the vision for the future, then we had two options; split or stay." As a result, Potgieter formed Aerosud in 1990, to focus on aeromechnical work, and sparked a feud with Atlas resolved only this year, with Aerosud leading South African suppliers in a strategic partnership with Boeing Commercial Airplanes.
Aerosud's first contract was the re-engining of the Mirage F1 with Klimov RD-33 engines. This joint venture with Klimov and Mikoyan, while fraught, exposed the company to international co-operation and prepared it for the re-opening of world markets in 1992.
The South African Air Force (SAAF) had built up a disparate mix of aircraft during the period of the arms embargo, which needed replacing. Many felt that the industry's hard-earned self-sufficiency should not be thrown away, but the tide of opinion was turning towards subcontracting. Theo Kleynhans, group manager for new business development at Denel Aviation, formed from Atlas and other defence contractors in 1992, says: "The shift from relying on our own competences to the role of being a subcontractor was not without resistance, but it had to be done."
The move away from reliance on one customer cascaded down the supply chain, with smaller suppliers finding niches. In 1994 defence electronics specialist Grintek commissioned consultants to identify areas in which it led and would be of value to international companies. The company had a wide portfolio, developed from many years' countermeasures requests from the SADF.
Zoli Kunene took over as chairman of Grintek in 1995 after three years of talks, with acquisition funded by wealth earned from distribution businesses in the Johannesburg townships. Under apartheid, black people were banned from owning most manufacturing enterprises. Kunene recalls that although he knew "nothing about defence and nothing about electronics" he could recognise "good products and committed engineers". Equally, the Grintek management knew little of finding new markets, as it had grown accustomed to basing its sales forecasts on the budget speech, says Kunene. "When you come from an environment where you have to fight for market share into a company with only one customer, then you can teach each other a lot of things," he adds.
Grintek decided not to establish sales and marketing operations around the world, citing the examples of dozens of South African export casualties. Instead, the plan was to form partnerships with European and North American primes. "In the past we had to do everything ourselves, but we recognised that we had fallen behind in some areas while we excelled in others," says Ben Ashe, managing director of Avitronics, part of the Grintron joint venture founded in 1998 with Saab Tech.
Grintek had developed lightweight radar and missile warners for South Africa's helicopter fleets, an area of specialism attractive to many foreign manufacturers. Its self-protection technology was also ahead of military thinking in Europe before the partnership with Saab started, says Ashe. Now, the Swedish air force is spreading the word in a way that Grintek could never do with its own sales force, says Ashe. "With a European partner we are able to go into the export market with confidence," he adds.
Strategic procurement
The defining moment in the process towards international partnerships was the strategic defence procurement deal of 1998, which linked industrial participation to contracts, says Kunene. The total value of the deal, announced a year later, was around $5.2 billion, with an order for 28 Saab/BAE Systems Gripen fighters, 24 BAE Systems Hawks, 40 Agusta A109s and four AgustaWestland Super Lynxes.
South Africa's government had not actively promoted aerospace companies in its early years, due to a negative perception of the defence trade. With the creation of the National Industrial Participation programme, however, this perception is changing as the programme has attracted over $14 billion-worth of foreign investment so far, including $8.7 billion from BAE Systems and Saab, making BAE one of South Africa's biggest investors.
The country's trade minister announced plans earlier this year to make investment easier, sanctioning a tax-break industrial development zone around Johannesburg International airport. Strategy consultancy Blue IQ is assessing an idea to widen the proposal into a wider "aerospace corridor" reaching up to Pretoria.
The government has considerable goodwill around the world, which it is belatedly exploiting to assist aerospace companies, says Knox Msebenzi, Denel group executive director for aerospace. "We are one of the few countries able to walk tall everywhere in the world, so we have access to some markets in the Middle East, Africa and South America, of which our competitors are jealous," he says.
One reason the government is eager to promote aerospace is to help reduce unemployment, which still runs at over 30%. "The government likes aerostructure assembly because it's labour intensive and jobs are the number one priority at the moment," says Potgieter.
Consequently, the country's national framework agreement on labour practices makes it virtually impossible to make redundancies, frustrating aerospace companies hoping to make productivity gains. Denel Group chief executive Victor Mosche, for example, is close to releasing restructuring plans that will see aerostrutures become a separate division to the components shop. But wider plans to cut costs by around 30% rely more on efficiency gains than personnel reduction, says Msebenzi. "If you compare our biggest company Denel against Boeing on the Flight International list of top 100 aerospace companies, you'll see the turnover per employee figure to be around double," says Weder. But salaries for many employees is lower, skewing the figures, he adds.
These lower wages are a positive draw for investors. Potgieter estimates that even with development and non-recurring costs, projects costs are around half those of the USA. Even so, South African companies have had more success in attracting European investment than North American, partly due to geography, says Weder. The country is on the same time zone as eastern Europe and cheap night flights to Europe make daytime meetings achievable. However, many industry insiders also point to a fear of the unknown among US companies as a contributing factor. "There is still a fear that the instability of the rest of the continent will affect South Africa and investments will be lost," says Weder. Msebenzi points to the government's record to date on the economy as proof that a "Zimbabwefication" of South Africa is impossible. Even detractors among aviation professionals admit that the current government's systems-driven approach and transparency makes it easier to do business than under the National Party, where deals where often agreed between members of the Afrikaner ruling elite, with little outside influence.
Improved environment
There are less tangible influences on the improved business environment too. A well-reported migration of skilled people took place following the ANC election victory and again following Nelson Mandela's handover to president Thabo Mbeki in 1989, largely to Commonwealth countries. Less well reported has been the return of many of these émigrés. Similarly, the country's fourfold reduction in violent crime over two years has received little attention, but the overall result is a vibrant business environment, says Graeme Conlyn, executive director of business aviation services company National Airways & Finance.
Yet growing international confidence in South Africa has its downside. The volatile South African rand had depreciated each year since 1993, which worked in the favour of the country as a low-cost supply base. Over the past 10 months the rand has risen by a third, wiping out some companies' slim profit margins, but providing an unexpected fillip to those who import. Currency speculation is not something South African managers are used to, says Kunene.
The single largest challenge facing South African aerospace businesses is black economic empowerment and employment. The government has targets to make every layer of business more representative of the population as a whole, and aviation is starting from a very low base. Every defence company was largely white and Afrikaans-speaking, as blacks and mixed-race workers were seen as constituting a risk and were not welcomed by the customer, says Kunene. "We inherited a lilywhite company and eight years down the line people who come and visit are pleasantly surprised about the amount of black faces, especially in the headquarters," he says.
One area where there has been less progress is in the hiring of engineers from previously disadvantaged groups, including women. "There is a dire shortage of black engineers because black universities did not offer engineering, so those who wanted to study it had to argue for an exemption to study at a white college, which was rarely granted," says Kunene. Today most aerospace companies offer adult apprenticeships to employees, often taking semi-literate employees on a transition course before the four-year aircraft mechanic curriculum. Conlyn says: "Over half the available manpower is black, but the majority of it is still semi-skilled and we have a moral duty as well as aneconomic need to train these guys and qualify them."
Attracting new staff as well as achieving productivity gains will both be crucial if the South African defence industry is to fulfil the $1.5 billion offset arrangement under the Gripen deal, which stipulates an unusually high 400% offset value. There are signs that as well as revitalising the South African industry, it will also have a positive impact on the entire region as Denel and others subcontract basic work to other African states. Despite initial criticism of huge defence spending in a country with more pressing needs, there are signs that reform and growth in the aerospace sector will be a force for national good.
Source: Flight International
