GCC countries are on a mission to localize defense spending and build up industrial capabilities in the region. However, they still rely primarily on foreign companies to meet the needs of the region’s armed forces. If they are to succeed, GCC governments, sovereign wealth funds, and defense companies need to focus on the right technologies and capabilities. Rather than large-scale weapons and platforms like fighter jets, they should instead look to smaller-scale technologies like robotics, artificial intelligence, and autonomous systems, through a range of ownership and partnership structures.
The region has a key advantage compared to other markets: abundant capital, particularly in sovereign wealth funds. Thus far, however, governments have struggled to allocate this capital—along with talent and other resources—to the most promising programs and technologies. It is tempting to want to develop an indigenous aircraft or other advanced platform, but many of those options are simply not feasible in the GCC. They often take decades to succeed and are typically the product of joint programs among countries that already have established manufacturing bases.
Instead, GCC countries need to invest in systems and components based on emerging technologies such as artificial intelligence, autonomous systems, robotics, cyber security, and system integration. These are promising defense investments for three reasons: they are critical to defense missions, they are not as capital or personnel intensive as traditional platforms, and these systems can be used in the civilian world. Investing in these technologies provides a military advantage, a sound return on investment, and stimulates development in precisely the knowledge economy and advanced industrial areas that the GCC needs.
Emerging technologies are changing operations and combat because they allow for unmanned platforms that remove armed forces personnel from danger, advanced logistics, information superiority, and more accurate targeting. The best known of these technologies is unmanned aerial vehicles (UAV), which are now used by armed forces and non-state actors alike. It is far cheaper to train UAV pilots than fixed or rotary wing pilots. Also, UAV pilots can fly more missions because they do not encounter the physical strain of fixed or rotary wing pilots. Using technology for information superiority was a critical element in the successful reduction of piracy off the Horn of Africa. The capability to process information faster than an adversary is one of the greatest advantages to any mission imaginable, a capability that is now powered by digital technology.
These technologies underlie defense and security platforms—in fact, they are now as important to defense missions as the products of heavy industry. Software in defense platforms is regularly updated in a way that hardware cannot be. Already, companies are producing such military equipment as engines and aircraft frames with sensors included so that they collect and report information back to headquarters or to deployed forces. The F-35 is an excellent example of this as it is as much an information platform as an aircraft. The F-35 is connected to military information, communications, and technology (ICT) infrastructure. It is also able to communicate and be interoperable with multiple other platforms, systems, and sensors. The F-35 collects large amounts of data on every sortie that can be stored and analyzed.
Moreover, these technologies require far less capital than large-scale platforms and systems and less human intervention—both during the manufacturing process and from armed forces during operations. Building tanks and war ships, for example, requires expensive engineering and heavy industrial capabilities, that can take decades to develop, and considerable amounts of capital investment. Digital technology, by contrast, is cheaper, faster and easier to upgrade, and develops at a more rapid pace. Removing military personnel leads to fewer military casualties and allows for longer endurance missions—some UAVs can fly missions exceeding 24 hours. These emerging technologies also do not have all the attendant costs that weigh on defense budgets, such as housing, healthcare, retirement, and pensions.
“Emerging technologies not only require far less capital than large-scale platforms and systems, but also less human intervention.”
As importantly, these technologies also have spillover applications in the civilian world, while some of these technologies come from civilian firms. As Shawn Brimley and Robert O. Work (the 32nd U.S. deputy secretary of defense) noted in their essay “20YY: Preparing for War in the Robotic Age” (Center for a New American Society, 2014) that “companies focused on producing consumer goods and business-to-business services are driving many other key enabling technologies.” Among the spill-over technologies are large-scale automated manufacturing, connected devices (such as the Internet of Things), and artificial intelligence (such as combined with robotics).
Critically, GCC governments do not need to develop these technologies from scratch. Rather, they can invest through a range of ownership and partnership structures, with varying degrees of managerial involvement.
The easiest and most direct option is for a government, defense company, or sovereign wealth fund to buy ownership stakes in mature defense companies—likely those in developed markets that already have a portfolio of defense technologies. Depending on the size of the investment, this approach can lead to preferential treatment, such as a board seat through which investors can get advance notice of global defense industry trends and developments.
“GCC governments can set up joint ventures to pool demand across the region and thus establish more cross-border business for local companies.”
GCC countries can also use a venture capital structure to invest in startups that have unique defense-related technologies and applications. Some organizations have created separate holding companies with an explicit mandate to identify and then acquire, or invest in, promising startups. For example, Lockheed Martin has started Lockheed Martin Ventures, a venture capital unit. Boeing has a similar organization called “Boeing Horizon X.”
Governments can also take advantage of their abundant capital to help fast-growing companies get through a cash crunch, particularly those in emerging markets. Egypt, India, Indonesia, Malaysia, Pakistan, Turkey, and South Africa all have rising defense spending and strong technical capabilities. Yet the economies of those countries are volatile, and some companies—even those with strong defense-related products and services—can struggle to survive when confronted with a large one-time order, a backlog in receivables, powerful customers and suppliers. A capital infusion would allow these companies to shore up their financial foundation while also allowing GCC investors to build partnerships with potential suppliers.
More broadly, GCC governments can set up joint ventures to pool demand across the region and thus establish more crossborder business for local companies. Some GCC-based companies already manufacture or trade defense products and services, or handle maintenance, repair, and overhaul (MRO) for platforms and/or systems. Aggregating demand would allow these companies to build economies of scale.
Regardless of which structure a government chooses, it must lay the groundwork before it can start making investments. That requires thinking through factors such as target financial returns, risk and liquidity expectations, the process for deals (including sourcing and timelines) and how governments expect to unlock value from a specific holding. In addition, as the investment pipeline comes together, governments need to conduct due diligence for all commercial, operational, technical, financial, and legal matters.
GCC governments, defense players, and sovereign wealth funds have taken some steps to build a defense ecosystem, but they will make faster progress if they focus on smaller digital technologies rather than massive weapons systems and platforms. This approach will lead to more localized spending, better manufacturing capabilities, and strong financial returns. Moreover, it will help equip the region’s armed forces to succeed in the missions of the future.
This article originally appeared in the Fall 2019 issue of Trends Magazine.
About the authors
Haroon Sheikh is a partner and Serdar Turkmen, a manager, with Strategy& Middle East, part of the PwC network.
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