The future of GCC defence investment

Executive summary

There has been significant activity in the defence industrial landscape in the Gulf Cooperation Council (GCC) in recent years, with governments and private-sector companies seeking to localise defence spending, develop indigenous capabilities, and generate a return on investment. Despite this activity, there has been limited progress in terms of capability development. Armed forces in the region still depend heavily on foreign original equipment manufacturers (OEMs).

To stimulate progress, GCC governments and defence companies should exploit their main advantage: abundant capital in sovereign wealth funds. By investing their funds strategically, decision makers can move faster to build up the region’s defence manufacturing capabilities and localise production of defence products and services, while still generating attractive returns. Specifically, there are six themes for defence investment:

• invest directly in mature companies
• invest in startups through a venture capital (VC) structure
• expand GCC companies through regional joint ventures (JVs)
• invest in companies that lack capital
• set up leasing companies
• outsource support functions

All of these options require the definition of a clear investment strategy in advance. The strategy should include a target focus for deals, a business model, levers for value creation, and considerations of the overall portfolio structure.

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A better approach to developing indigenous capabilities

Governments and armed forces in the GCC have launched concerted programs in recent years to localise defence spending and build up the region’s defence industrial ecosystem. However, decision makers have struggled to allocate resources such as capital and talent when determining which programs and technologies to develop in-country. Simultaneously, recent developments in technology and the shift toward digital warfare have had a significant effect on the defence and security landscape. These changes have made technology and software as important to defence as the products of heavy industry.

In this environment, it is not realistic for small countries to develop advanced platforms exclusively through their own resources, nor should they need to. For example, developing an indigenous aircraft platform can take decades. Many of the large and costly platforms that exist today are the products of multinational consortia in which countries participate based on their substantial capabilities (such as the Eurofighter Typhoon). Attempting to build too much in-country can also lead to disappointing results because of biases among decision makers.

Rather than chasing after unfeasible defence options, GCC countries should focus on a narrower set of advanced capabilities and technologies. GCC defence companies should put their efforts into small-scale systems and components based on artificial intelligence (AI), autonomous systems, robotics, cybersecurity, and system integration. Given that the GCC countries are relatively small and do not possess the heavy manufacturing capabilities of larger, more developed economies, developing such technologies is a more viable option than seeking to build large-scale defence platforms.

These technologies are becoming more important as they underlie defence and security offerings, and they will give any defence industry an edge in the global market. Such technologies are also attractive from a financial standpoint because they require far less capital than large-scale platforms and systems. What is also appealing is that these technologies require less human intervention from industry during the manufacturing process and from armed forces during operations.

Conclusion

Although GCC governments, defence players, and sovereign wealth funds have made some progress in building up a national defence ecosystem, they also need to consider new approaches that can more rapidly capture financial and/or strategic value. Investment in existing businesses is one option, but investors should also focus on emerging digital technologies and applications. Implemented correctly, the approaches discussed here will develop defence industries in GCC countries, generate financial returns, and equip the region to protect itself better.