The UAE Defense Industry: Market Opportunities and Entry Strategies to 2016
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The United Arab Emirates (UAE), one of the world’s most lucrative markets for foreign defense OEMs, is expected to spend US$142.7 billion on defense during the forecast period.
The United Arab Emirates is located on the south side of the Strait of Hormuz, a waterway through which 40% of the world’s oil is exported and which also shares a border with Iran. Territorial disputes with Iran, combined with its recent advances in ballistic missile technology, have driven the UAE to focus on the development of its own aircraft and missile systems, which accounted for 96% of the country’s total defense procurements during 2004–2009. Indeed, the country’s lack of indigenous defense capabilities and trained manpower has led the UAE to seek technologically advanced, high quality defense systems from foreign OEMs, in order to provide effective protection to its strategic assets and critical infrastructure.
Currently the UAE accounts for 4.9% of global arms imports, making it the world’s fourth-largest defense importer. Furthermore, its annual defense expenditure is expected to record a CAGR of 12.09% during the forecast period, of which US$58.3 billion will be spent on arms procurements. An equivalent amount will be spent on the training of its armed forces and on the maintenance, repair and overhaul (MRO) of existing defense systems.
The country is also projected to spend an average of 5.8% of its GDP on defense during the forecast period, with an average per-capita defense expenditure of US$4,076 over this period, in accordance with its commitment to the protection of its civilians and critical infrastructure.
During the forecast period, attractive opportunities are expected to emerge in multi-layered missile defense systems, unmanned aerial vehicles (UAVs), early warning systems and satellite communication systems.
Additionally, opportunities in geographic systems are expected to arise, as a result of the governmental focus to map critical infrastructure with surveillance systems, in order to plan for disaster prevention and recovery.
While the US remains the largest defense supplier to the UAE, efforts to diversify arms procurement is increasing imports from Europe
The US is the largest supplier of arms to the UAE, accounting for 59% of the country’s arms imports during the review period. In return for highly sophisticated defense systems, the UAE allows the US to use its ports as a base for its military operations in the Gulf.
However, in an effort to reduce its dependence on a single supplier and diversify its defense systems, the UAE also increased its purchases from France, Germany, Russia and Romania during the review period. Indeed, France also shares a strong strategic relationship with the UAE and is its second-largest supplier, accounting for 41% of its arms imports during the review period.
Defense deals come attached to an offset obligation equivalent to 60% of the contract value
The UAE has a stringent offset policy, which requires defense contractors to either transfer technology or establish joint ventures with local firms in non-oil sectors. These obligations have contributed to significant growth in the domestic defense sector in the fields of shipbuilding, systems integration, naval logistics and MRO activities. The UAE Offset Program Bureau oversees the fulfillment of these obligations and has established various investment vehicles to assist their completion.
Foreign OEMs explore alternative routes to enter the UAE’s defense market
With the exception of naval systems, which are built in the UAE with foreign technology and components, foreign OEMs have historically preferred to manufacture defense systems outside of the UAE.
Instead, foreign OEMs normally choose to establish a branch office or appoint a commercial agent to represent their business interests in the country, both of which involve minimal participation of UAE nationals.
However, many foreign companies with a long-term strategy for participation in the country’s defense market have recently begun to establish limited liability companies (LLCs) within the country, which require at least a 51% ownership from UAE nationals and a significant presence in the management of the firm. In addition, defense expositions hosted by the country can also serve as an entry route for foreign OEMs, as the UAE often makes significant purchases at such events.
Key challenges for foreign OEMs are the stringent offset obligations set by the government and the requests for technology transfers in defense deals
Although investment vehicles have been established to assist foreign contractors in meeting their offset obligations, meeting the profitability requirements of such obligations remains a key challenge. Indeed, many foreign OEMs have found it difficult to identify worthwhile projects, and considerable time is often lost in assembling and implementing an acceptable offset venture. Additionally, in order to enhance its indigenous capabilities, the UAE often requests foreign OEMs to share proprietary information with domestic defense firms. Although some foreign OEMs have been part of successful joint ventures with domestic firms, the majority are still reluctant to share proprietary information, especially when they are unable to command a majority share in the venture.
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