Saudi Arabia's security, aerospace and defence sector continues to expand with increased spending and modernisation

Saudi Arabia has long been a major investor in its military, with defence outlays representing a significant portion of the national budget. Despite the drop in oil prices since mid-2014, which in the short term is having a noticeable impact on the government’s military spending, defence spending is likely to continue to grow, with multi-billion-dollar contracts still being signed.

While contracts with foreign military suppliers – such as the $29.4bn F-15SA (Saudi Advanced) deal with US firm Boeing in 2011 – will remain a key part of the Saudi military composition, an increased emphasis has been placed on developing a domestic defence sector, with strategic partnerships and the funding of research facilities.

There is currently a growing industry of domestic defence-related companies in Saudi Arabia, with many of them tied to the aeronautics segment in particular. At the same time, the global landscape for defence and security has increasingly moved away from traditional military capabilities and towards cybersecurity concerns. Saudi Arabia has consequently turned its attention to improving its cyberdefences, especially in light of the 2012 malware attacks targeting the Kingdom’s energy giant Saudi Aramco, in which 30,000 workstations were hacked (see analysis).

Shifting Perspective 

While a strong and modern military – both in terms of size and the purchasing of the latest available hardware – has been a key pillar of internal and external security, the Kingdom has focused on wider regional security challenges in particular in recent years. Within this context, greater emphasis has been placed on homeland security, especially when it comes to securing the Kingdom’s northern and southern land borders, as well as counter-terrorism and cybersecurity. Despite this new focus, traditional military spending will likely continue to grow as the country aims to keep its military supplied with the most advanced equipment available.

The nation’s economic development plan, Vision 2030, includes the goal of localising 50% of total military equipment spending by 2030. In 2015 Saudi Arabia was the world’s third-largest military spender behind only the US and China, yet just 2% of this spending was within the Kingdom.

Military Structure

Saudi Arabia’s armed forces are made up of the Royal Saudi Land Forces, which include the Kingdom’s Special Forces, the Royal Saudi Air Force (RSAF), the Royal Saudi Navy and the Royal Saudi Air Defence Forces. In addition, there are also the Royal Saudi Strategic Missile Forces and the Ministry of National Guard, formerly the Saudi Arabian National Guard.

According to the International Institute for Strategic Studies, the Saudi military numbers roughly 227,000 troops, with 75,000 enlisted in the army, 20,000 in the air force, 16,000 as part of the Royal Saudi Air Defence Forces and 13,500 in the navy. There are also 100,000 men in the National Guard, as well as 2500 belonging to the Royal Saudi Strategic Missile Forces. The Saudi military also has 600 heavy tanks, 1423 armoured troop carriers, 780 light armoured vehicles, 313 fighter jets, and air defences that include 16 batteries of US-made Patriot missiles. Meanwhile, according to World Bank data, quoting figures from “The Military Balance”, an assessment of global military capabilities and defence economics by the International Institute for Strategic Studies, as of 2014 the number of armed forces was slightly higher, at 251,500.

Spending

Saudi Arabia continues to be a significant net spender when it comes to its defence and security needs, with much of this business still directed to military equipment manufacturers in countries like the US and the UK. However, in recent years there has been a strong push to localise production and diversify the regions from which the Kingdom buys its military equipment.

With the country’s budget almost exclusively funded by oil revenues, the decline in energy prices since mid-2014 has resulted in a decrease in the budget for military equipment and services. In its 2016 budget the Kingdom cut its allocation for military and security services by 31%, down from SR307bn ($81.8bn) in 2015 to SR213.4bn ($57bn) in 2016, according to figures released by the Ministry of Finance. “The drop in the budget has been detrimental. It has gone from buying new equipment to sustaining existing equipment,” Tarik Solomon, director of international business development at Shamis Technologies, which operates in the defence sector, told OBG. “The next two to three years are about sustainability. However, the budget cuts are not permanent and there will continue to be large opportunities in the sector.”

A Leading Importer

According to a report by the Stockholm International Peace Research Institute (SIPRI), Saudi military imports in the period from 2011 to 2015 increased by 275% when compared to the period 2006-10. The report found that Saudi Arabia was the world’s second-largest weapons importer, behind only India, with UK companies alone selling more than £5.6bn worth of military hardware to Saudi Arabia between 2011 and 2015, and in 2015 the Kingdom was the world’s number one importer of weapons. Overall, military imports to the Middle East increased by 61% in this period. In 2015 the Kingdom spent an estimated $87.2bn on its military, according to SIPRI.

Major military contracts continue to be signed with large international defence firms. Local media reported in late February 2016 that five agreements had been signed on the opening day of the inaugural Armed Forces Exhibition for Diversification (AFED), a well-attended, multi-day exhibition and conference that brought together leading industry players in Riyadh. The five agreements, which were for locally manufactured defence equipment, included the multi-purpose Sikorsky S-70 Black Hawk helicopters, as well as Antonov cargo aircraft and satellites for reconnaissance and imaging purposes.

Modernisation

Since the 1980s Saudi Arabia has spent heavily on modernising its military hardware, primarily by buying technology and equipment from foreign manufacturers. These deals continue to be substantial, with major contracts signed for land force, air and naval acquisitions.

In 2011 the Kingdom signed a $29.4bn deal for the procurement of 84 F-15SA fighter jets, as well as the upgrade of 70 F-15S fighters already in operation in Saudi Arabia. The planes were expected to start being delivered in 2014, but after a longer-than-expected testing period now look set to start arriving in mid-2017. In April 2016 the Kingdom also signed a $3bn deal for the purchase of 30 additional Hawk jets from UK defence firm BAE Systems, to be used to train RSAF pilots. This was on top of the 72 Typhoon aircraft that Saudi Arabia agreed to buy from BAE in 2007, in a deal worth approximately $7.3bn. By 2011, a total of 24 of Typhoons had been delivered, and the RSAF, which has long been one of the best-equipped air forces in the region, took a delivery of another 12 Typhoons in 2015.

The Kingdom has also bought a number of unmanned aerial vehicles (UAVs), including Falco UAVs, produced by Selex ES of Italy, as well as Wing Loong UAVs, which were designed and developed by China’s Chengdu Aircraft Design Institute.

Upgrades are rolling out across the other armed services as well. In 2014 Saudi Arabia signed a 14-year contract with the Canadian subsidiary of US defence provider General Dynamics Land Systems to build and supply 1000 light-armoured vehicles, as well as their associated equipment and support, in a deal that could be worth up to $13bn if all of the options are exercised.

Naval Expansion

The Kingdom is also moving forward with the Saudi Naval Expansion Programme II (SNEP II), which will see its Gulf-based eastern fleet being heavily modernised.

In May 2015 it was announced that the Saudi navy was seeking to buy 10 Sikorsky MH-60R Sea Hawk helicopters, along with associated weaponry, systems and logistics, in a deal worth an estimated $1.9bn. The helicopters would operate from aboard the frigates and corvettes.

In October 2015 the US Department of State gave its approval for the proposed sale of four heavily armed Lockheed Martin littoral combat ships (LCS) to Saudi Arabia, in a deal that would be the first international sale of an LCS variant and could be worth up to $11.25bn once all of the weapons, systems and support services are included. The contract was expected to be signed in 2016; however, reports surfaced in January 2016 that suggested the Kingdom had turned down the offer due to the high costs and long timeframe, although negotiations are thought to be continuing. The combat ships would be the main component of the SNEP II programme, which would also likely include six new corvettes, upwards of 20 patrol vessels and three maritime patrol aircraft.

In January 2016 it was also announced that the Kingdom was set to sign a contract with Spanish state-owned shipbuilder Navantia for the purchase of five Avante corvettes. The deal is estimated to be worth more than €3bn, with the ships developed as versions of Navantia’s Avante 2200 design. Construction is expected to begin in 2016, with the corvettes to be delivered within five years. In October 2015 the French prime minister, Manuel Valls, came to Saudi Arabia on an official visit and signed contracts worth €10m, among which were letters of intent for the sale of 30 patrol boats, according to media reports.

In total, the SNEP II programme is expected to cost up to $22bn and will go a long way towards strengthening the Kingdom’s eastern fleet. The western fleet, based in the Red Sea, already contains seven French-built frigates and is considered to be more technically advanced.

Foreign Partners

While traditional military manufacturers and the Kingdom’s allies continue to sign contracts with Saudi Arabia, other countries are increasingly attempting to become involved in this market. In January 2016 it was reported that Turkish defence companies were pursuing major contracts in the Kingdom, with Turkish armoured vehicles manufacturer FNSS Defence Systems looking to win a contract that could potentially be valued at over $10bn. Saudi Arabia was also said to be interested in Turkey’s new generation Altay battle tank and Turkish Aerospace Industries’ ANKA UAV technology.

Turkey is not alone on this growing list of prospective defence suppliers. “While the US-Saudi defence cooperation is still very strong, from a defence perspective we are seeing robust strategic alliances made with Turkey, Pakistan and China regarding defence cooperation and spending,” said Solomon. “Relations with Turkey, Pakistan and China have grown intensely in the last couple of years. This is mainly to enhance military capabilities and technologies in radar, communications, electronic warfare, aircraft and small arms. The biggest issues for the West are higher prices and restrictions on the exportability of technology. Products from these countries are cheaper, but not always better,” he added.

This growth in the number of countries that are attempting to win contracts to supply the Kingdom’s military is likely to be a benefit for the sector, with increased competition bringing down prices, in addition to opening up the range of new technologies and expertise.

Localisation

Speaking at the opening of the AFED conference in February 2016, Mohammed Al Ayesh, assistant minister of defence, said that Saudi Arabia aims to produce at least 50% of the country’s military requirements locally by 2030. This fits with Saudi Arabia’s long-term goal to become increasingly self-sufficient when it comes to supplying and maintaining its military, as well as the goal of benefitting more from military spending in terms of job creation and industrial growth.

In the 1980s the Saudi government set up an economic offset programme (EOP) aimed at requiring successful bidders on government contracts to invest part of the value of the contracts in joint-venture (JV) programmes within the Kingdom. The rules mandated that companies invest upwards of 35% of technical and service aspects of contracts in ventures that would offer high-value jobs to Saudis. However, according to a 2013 report by management consultancy AT Kearney, the EOP has had less of an impact than expected. By the end of 2006, 36 companies had been established through the programme with a total capitalisation of $4.5bn. This is compared to the total military capital expenditure of $150bn spent by the Kingdom between 1988 and 2006, which should have seen upwards of $45bn spent on the programme and between 750 and 2600 jobs created per $1bn – as opposed to the 120-150 jobs per $1bn that were actually created – if the programme had been properly enforced.

In 2011 the government, in part to assist in the EOP, established TAQNIA. Fully state-owned, it was founded for the purpose of taking ideas from the innovation stage to develop commercial products and localise production in Saudi Arabia through strategic partnerships with companies around the world. “The problem was that our procurement system in the past did not give any advantages to local production. It was judged on the best price. The offset programme wasn’t implemented very well, and that’s why TAQNIA was established,” Hamad Alyousefi, CEO of defence and security technology at TAQNIA, told OBG. “The biggest challenge is the lack of regulations to ensure localisation, but that is happening now. It is a required aspect in all military contracts.”

Fostering Technology Transfer

The government has pushed through a number of measures in recent years aimed at helping to establish local companies that are involved in the defence sector. In 2011 Prince Khalid bin Sultan bin Abdulaziz Al Saud announced the creation of a General Department within the Saudi Armed Forces Command that would be in charge of the technology transfer and also local industrialisation.

In 2013 the Council of Ministers also approved a new law that gave priority to what was at the time called the General Organisation for Military Industries but is now Military Industries Corporation (MIC) – whose main priority is supporting national security through the creation of a sophisticated military industry – when it came to the purchase of arms, ammunition and other military equipment. As a sign its national importance, in 2015 King Salman appointed the then long-serving CEO of Saudi Arabian Basic Industries Corporation (since 1998), Mohammed Al Mady, to take over MIC.

While in the long run this move to localise military acquisitions is likely to involve Saudi companies manufacturing domestically designed and produced hardware, in the short term it is more likely to involve JVs set up by international defence equipment manufacturers and Saudi firms, especially those working in the assembly and repair of hardware designed and manufactured abroad.

“I think we didn’t properly leverage our buying power in the past to achieve the strategic target of industrial diversification. That is not just the defence sector but all sectors – electricity, water and telecoms. We didn’t leverage spending enough. What we are seeing today is the addressing of this situation,” Ghassan Al Shibl, former CEO and now senior advisor to the board of directors at Advanced Electronics Company (AEC), told OBG.

There are already some examples of JVs manufacturing military hardware in the Kingdom. In April 2016 South African defence equipment manufacturer Rheinmetall Denel Munition, in partnership with MIC, opened a weapons factory in Saudi Arabia that will specialise in the production of 60-mm, 81-mm and 120-mm mortars, as well as 105-mm and 155-mm artillery shells. The factory has a reported capacity of 300 artillery shells and 600 mortar rounds per day, with the munitions expected to be mainly used by the Saudi military.

Aeronautics

Saudi Arabia is also working hard to develop a domestic aeronautics sector, and while this does include civil aviation, part of it is aimed at military capabilities. Saudi Aerospace Engineering Industries (SAEI) is currently building a SR3.5bn ($933.1m) aircraft maintenance, repair and overhaul facility in Jeddah.

The facility, led by Turkish airport builder and operator TAV, will be the largest facility of its kind in the Middle East, at 1m sq metres. While the facility, which is made up of 11 aircraft hangars and 28 aircraft component shops, will initially concentrate on civil aviation, it has the potential to move into military work. “It’s not a big secret that the military in Saudi Arabia is quite extensive, and we believe there is a big opportunity there,” Nader Khalawi, CEO of SAEI at the time, told reporters at the Dubai Airshow in November 2015.

Helicopter Deals

In February 2016 TAQNIA Aeronautics signed an agreement with Sikorsky, a subsidiary of the US-based Lockheed Martin, to jointly explore the option of helicopter production in Saudi Arabia. Ultimately this could lead to the assembly of Sikorsky S-70 Black Hawk helicopters in the Kingdom. “Saudi Arabia is now taking the first bold steps in becoming a competitive manufacturer of military aircraft. In addition to creating jobs, the Kingdom will begin developing national manufacturing capabilities in a vital sector for our national security,” Ali Al Ghamdi, CEO of TAQNIA Aeronautics, told OBG. In addition, in October 2016 it was reported that Sikorsky had won a $91m contract to deliver eight utility helicopters to Saudi Arabia before the end of 2017.

Aircraft Maintenance

Ukrainian aircraft manufacturer Antonov has announced that it is opening a facility in Saudi Arabia, also with TAQNIA Aeronautics, to produce AN-132 and AN-178 multi-purpose transport planes and AN-148 aircraft, as well as provide after-sales support for the planes and other Antonov aircraft. While the Kingdom is attempting to expand its presence in the assembly of military hardware, it is also strongly pushing to localise the repair and maintenance aspect of existing planes and other equipment, in part to bring highly skilled jobs to Saudi Arabia but also to boost the country’s self-sufficiency and improve its skills base, and ultimately for it to become a regional centre for aircraft maintenance. “Upgrading and refurbishing ageing aircraft is an opportunity because of the slowing economy, which is causing large, new capital expenditures to be pushed further down the road,” Fawaz Mohammed Sharabi, CEO of GDC Middle East, told OBG.

In July 2014 AEC, a JV established by BAE Systems under the EOP, became the first approved avionics repair agent outside of Europe for the UK-made Typhoon jet fighter. This JV will ultimately see the transfer of repair capabilities for 37 avionics kits for the Typhoon to the Kingdom, creating upwards of 120 highly skilled technical jobs for Saudis.

“This is an extremely important agreement. Today, our armed forces are trying to bring support much closer to operations,” said Al Shibl. “The logistic chain is not only about acquiring spare parts, but also about doing the repairs. This is vital. For Saudi Arabia, local repairs are no longer a choice, we have to do it. The Typhoon agreement took well over three years to finalise, but now the contract that was signed can become a model that can be imitated on all our other platforms in the Kingdom. The objective of the agreement is to transfer the majority of repairs, when it comes to electronics, to Saudi Arabia,” he added.

In July 2015 it was announced that BAE Systems and Al Salam Aircraft had jointly established a facility to perform repairs, maintenance and overhauls of the windscreens and transparencies for the RSAF’s Typhoon aircraft, marking another step forward in Saudi Arabia’s attempts to localise its military maintenance and repair contracts.

Local Technology

For decades Saudi Arabia simply bought existing military systems, sometimes without having the training or knowledge among its personnel to effectively operate them, but in recent years this has changed.

The Kingdom’s defence industrialisation is now advancing considerably, according to the international affairs think tank, the Atlantic Council. In its assessment, Saudi Arabia is now able to copy and reproduce said technologies, and could soon be able to produce or adapt existing technologies to meet its own security needs.

In 2010 the Saudi Ministry of Defence created the Central Committee for Local Industrialisation, comprising business leaders and defence officials, which aimed to reduce delivery times and costs, and also enabled local companies to bid on contracts to supply basic materials to the military for the first time. The move opened up the possibility of local firms winning contracts for some 15,000 basic items used by the military, including plastics, pipes and covers for jet engines and batteries, though it excluded contracts for firearms and munitions. The overall goal was to develop the domestic capabilities and also to encourage foreign suppliers to partner with Saudi firms in establishing manufacturing bases in the Kingdom.

Armour

The country produced its first armoured vehicle almost two decades ago, with the Al Fahd, manufactured by the Abdallah Al Faris Company for Heavy Industries, going into development in the late 1990s. While the vehicle continues to be used by the army, with two varieties currently available – the AF-40-8-1 Armoured Personnel Carrier and the AF-40-8-2 Armoured Fighting and Reconnaissance Vehicle – Saudi Arabia still relies heavily on other imported hardware, which is unlikely to change in the near future.

One area that Saudi Arabia has made progress in is UAV, or drone, technology. In 2013 King Abdulaziz City for Science and Technology (KACST) announced that it had produced 38 drones, made from a mixture of fibreglass and carbon fibre. These drones contained programmes enabling them to adapt to changing environmental conditions while flying. One of the drone types, the Saker 2, has a range of 150 km, a battery life of eight hours, and can carry photography and monitoring equipment with a range of 150 km – extendable to 250 km – that could prove ideal for Saudi border protection. Another of the drones, the Saker 3, is for short-range operations, weighs just 4.5 kg and can travel at 50 km per hour at an altitude of 1000 metres. These technologies point to the growing ability of the Kingdom to meet its own military and security requirements.

Another major player in UAV development is the Prince Sultan Advanced Technology Research Institute (PSATRI). Founded by King Saud University and the RSAF in 2008, PSATRI’s mission is to conduct applied scientific and technical research and development to support the RSAF as well as other Saudi military and security clients in becoming more effective regional defence leaders through technology and innovation.

Research Base

There is an expectation that Saudi military industrialisation will benefit from the heavy investment that has taken place over recent years in universities and research centres across the Kingdom. These include institutions such as KACST – which was established in 1977 and has become a leading science and research institute with more than 2500 staff and researchers from around the world – as well as King Abdullah University of Science and Technology (KAUST), a private research university that opened in September 2009 and has been advancing scientific research. These institutions, along with state-owned companies including TAQNIA, could help propel Saudi technology forward.

“I think if we can establish good capabilities and technology we can actually compete and become an exporter. I expect this to start in the next few years, and for us to become a big exporter in five to 10 years,” Alyousefi told OBG.

In 2013 Lockheed Martin, which also has active partnerships with KAUST and the Al-Faisal University in Riyadh, launched a strategic partnership with KACST in order to help develop the next generation of Saudi defence sector professionals. At the time, Hatim Behairy, director of the National Electronics, Communications and Photonics Centres at KACST, said that the agreement would see Lockheed Martin transfer technological expertise to the next generation of Saudis, while emphasising that the partnership would cover the defence, military and technology sectors, as well as other areas that the company is involved in. In addition, Boeing has signed partnership agreements with KACST and KAUST in recent years that should see substantial investment made in further research and technology development.

Border Defence

The continued volatility in the region has led Saudi Arabia to invest strongly in securing its borders in recent years. In September 2014 King Abdullah bin Abdulaziz inaugurated the Northern Border Security Project, the first phase of the Kingdom’s new border security infrastructure. Consisting of three fences, seven command and control centres, 40 surveillance towers – which are equipped with radar and day and night cameras – as well as 38 communication towers (all connected through 1.45m km of fibre-optic cables, which also run to the national headquarters and the Ministry of Interior) the border defence extends 900 km along the Kingdom’s northern border with Iraq. There are also 240 response vehicles and 10 surveillance reconnaissance vehicles attached to the border defence.

The government is looking to enhance the nation’s current capabilities to secure its borders, which could see deployment of more advanced systems. This will provide significant opportunities for companies, either working independently or in collaboration with Saudi industry.

Training

Given the size of the Saudi military, and its high-tech acquisitions, there are continued opportunities for the training of personnel, whether technicians, officers or soldiers. Saudi military personnel have significantly enhanced their military training and competency in recent years and can now operate some of the most sophisticated weapons systems, according to a 2014 report issued by the Atlantic Council. Nevertheless, room for improvement remains, meaning that training is still needed for the military, which offers strong potential for foreign companies.

Outlook

Even with reduced military spending in 2016 due to the drop in global oil prices, the outlook for the security and defence sectors in Saudi Arabia is strong, with the Kingdom likely to sustain its historically high level of investment.

Major contracts with international firms for top-of-the-line military hardware will continue to be signed, while at the same time an increasing number of JVs for the local assembly, maintenance, design and manufacturing of military hardware in the Kingdom will be established.

With the government focused on both localising production and advancing the Kingdom’s military industrialisation, there will also be a significant increase in the number of strategic partnerships being announced between Saudi Arabian companies and research institutions as well as their international counterparts. The next few years could see great changes taking place as the Kingdom continues its drive for increased self-sufficiency in supplying and maintaining its armed forces.