DENEL GROUP

PRESENTATION ON DENEL
PUBLIC ENTERPRISES PORTFOLIO COMMITTEE WINTER SCHOOL

11 AUGUST 2009
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 CONTENTS

• The history of the SA defence industry

• Overview of Denel
• The global defence market
• The SA defence market
• Denel’s historical financial performance
• Implications of defence trends for Denel
• Denel’s turnaround strategy
• Progress: strategy implementation
• Denel’s growth strategy
• Denel’s values
• Denel priorities

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SOUTH AFRICA’S UNIQUE HISTORY HAS RESULTED IN THE
DEVELOPMENT OF A DEFENCE INDUSTRY UNLIKE ANY OTHER
NATIONAL MODELS

World Arms race End of Cold War Rise of asymmetric warfare

60’s and 70’s Late 80’s and 90’s Mid 1990’s Today

SA Self sufficiency Industrial/technical leader Reprioritisation of defence Industry re-focus

build up spend
Total SA R110b R228b R280b R473b
government
spend*

Defence as % 7.7% 14% 7% 5%

of gov spend

Defence High High Declining Low (less than 0.5%)

R&D spend

Export None None Some success for SA in Export account for >60% of
overseas markets industry turnover

SADRI Armscor controls One of the most significant Denel becomes the Many new start ups
position production facilities national activities leading local company Industry reliant on export
and manufacturing Large employment Government purchased
contribution (esp engineers) large complicated systems
Leading technology from overseas
* in 2005’s price level development
Source: Global insight, DoD policy and planning

End June 2009

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 Overview of Denel

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 DENEL IS A STRATEGIC DEFENCE COMPANY

Personnel employed by
Denel Group:
Denel: 5 167
Ass. Companies: 2 129
TOTAL: 7 296
Includes approx. 1400
Engineers & Scientists
With 6X
Multiplication factor on
SA Economy

End June 2009

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 DENEL CONTRIBUTES TO NATIONAL SECURITY AND HIGH
TECHNOLOGY MANUFACTURING
• Effective contribution to National Security
– Local industry plays a vital role in security of supply, optimised acquisition, life-cycle support and cost of ownership –
1998 White Paper on Defence
– Sustainable technology base to enable DoD to acquire products uniquely suited to the African theatre of peacekeeping

• Contribution to the economic and manufacturing base

– Skill intensity: opportunity for deep, applied scientific and engineering base
– High-end skills development and retention
• Denel Centre for Learning and Development (DCLD)
• Denel Youth Foundation Training Program focuses on upgrading mathematics and science
• Engineering bursary, internship and mentorship programmes
– IP creation and cross-leveraging in other industries (globally defence industry is a key incubator)
– Denel skills infusion across SA industries (e.g.. electric car programme of DST, PBMR, SALT telescope)
– Supports an extensive local supplier base: 70%+ local procurement
– Employment multiplier: X6 (6 jobs in the supplier base for every engineer employed)
– Major Forex earnings through exports

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DENEL PLAYS A MAJOR ROLE IN TECHNOLOGY DEVELOPMENT

Denel, DoD and Client Collective 2009 R&D Investment – R1,2 billion
• Sovereign missile capability with niche design, development and manufacturing capacity within Denel,
associate companies and local manufacturing base
• Security of supply of world-leading munitions range, with state of the art propellant, chemical
engineering and metallurgical competencies
• Independence in brass/pure copper extrusions
• Advanced gearbox, composite structures, combat turret as well as artillery design, development,
manufacture, qualification and certification
• World-leading landmine protection/clearance and ballistic protection technologies
• Certified local Maintenance, Repair and Overhaul capabilities meeting international accreditation
standards
• State of the art photonics capabilities and associated product/component design, development and
manufacturing capacity
• Development of an expanded local engineering and manufacturing supply chain
• Retention of appropriate wind tunnel and mathematical modelling capabilities
• Operational testing/certification and space launch vehicle support

Active participation in DST technology forums: Optronics, photonics, UAVs, micro-electronics,

autonomous guidance control and advanced materials.

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R&D SPEND TOTALLED R1,2bn IN 2008/09 – NEED FOR STRATEGIC
SPEND ON NEW PRODUCTS TO MAINTAIN COMPETITIVENESS

Entity Total Sales Own Funds Client Funds Total

(RM) % of Sales (RM) (RM)
(RM)
Mechem 267,569 0.1 0,219 0,219
Denel Aviation/Rooivalk 910,753 1.1 10,269 109,788 120,057
Dynamics (Missiles) 571,442 0.1 3,001 299,042 302,043
Dynamics (UAV) 144,603 2.6 3, 868 3, 868
DISS 79,437 79,697 79,697
DLS 425,021 0.6 2,731 210,301 213,031
PMP 600,552 1.4 8,654 8,654

DSA 598,897 0.2 1,111 399,307 400,418

RDM (South/North/La Forge) 976,523 5.2 50,824 18,700 69,524
Carl Zeiss Optronics
385,000 3.2 12,253 12,253
Total R&D Spend
92,930 1016,835 1 209,765

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HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF
TECHNOLOGY INCUBATORS BEING ESTABLISHED
Denel Aviation/Rooivalk
• Helicopter design, qualification and certification
• Certified MRO services and component repair to international standards
Denel Dynamics Missiles
• Applied MEMS technology
• Missile design, development, manufacture and qualification
• Advanced aerodynamic modelling and simulation
• Micro-servos and flight control management
• Advanced materials technology application (carbon-carbon)
• Systems engineering and advanced systems integration
• Logistics engineering
Denel UAVs
• UAV design, development, manufacture, qualification and certification
• Autonomous flight control management
• Mission planning and software certification

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HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF
TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)

Denel Integrated Systems Solutions

• Systems engineering and advanced systems integration
• Logistic engineering
Denel Land Systems
• Systems engineering and advanced systems integration
• Integrated ballistic systems design and development
• Turret and ballistic protection design, development and integration
• Main weapon (artillery/rapid fire) design development and manufacture
• Ammunition handling systems
• Logistics engineering
• Hydraulic/electrical/air conditioning/vehicle platform specification and design
• Landward mobility modelling and simulation
• Vehicle/combat system testing and evaluation
• Material and metallurgical specification/design

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HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF
TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)

Mechem (Pty) Ltd

• Landmine protection and clearance
• Chemical Sniffer technology (inclusive of canine breeding and training)
Overberg Test Range
• Flight test technologies and applications
• Satellite telemetry
• Satellite launch and orbital support
Pretoria Metal Pressings
• Brass/copper alloy casting and strip extrusions
• Advanced explosives design and manufacture for military and commercial applications
• Applied detonics for military and commercial applications
• Tungsten carbide mining drill bit design and manufacture
• Powder metallurgy – tungsten-copper (missile grade/switch gear)

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HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF
TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)

Denel Saab Aerostructures (Pty) Ltd

• Aero-elastic modelling and simulation (design and fatigue)
• Applied fracture mechanics
• Advanced aluminium/composite aerostructures design, manufacture, qualification and
certification
• Thin-wall aluminium machining and assembly
• Fibrous/carbon composite layups, curing and machining
• Advanced fluid press extrusions
• Non-destructive testing
• Certified surface/heat treatment
Rheinmetall Denel Munitions (Pty) Ltd
• Advanced propellant design, manufacture and certification
• Powder/ball/cast propellant manufacture
• Advanced materials technology application (composite/steel)
• Advanced forging technology

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HISTORICAL INVESTMENT HAS RESULTED IN A NUMBER OF
TECHNOLOGY INCUBATORS BEING ESTABLISHED (CONTD.)

Carl Zeiss Optronics (Pty) Ltd

• Photonics research
• Optical design
• Optical payload manufacture, qualification and certification
• Opto-mechanical design, manufacture and assembly
• Certified opti-mechanical design, manufacture and assembly for space payloads
Turbomeca Africa
• Advanced manufacturing
• Aerospace gearbox manufacturing, qualification and maintenance

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 The Global Defence Market

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GLOBAL DEFENCE SPEND IS LARGELY INACCESSIBLE TO
INDEPENDENT CONTRACTORS SUCH AS DENEL

$b
ROUGH ESTIMATES
Contracts awarded by US
Department of Defence*
US companies 89%
NATO companies 11% NATO land vehicle example
Other companies 0%
~360 National companies 76% • Near impossible for
Other NATO companies 22% independent contractors


Non-NATO companies 2% to serve USA and NATO
countries
~190
• Competition to serve
remaining markets is


~170 intense:
– Exports from major
~81 US and European
players
~34 ~55 – Development of
domestic industries
(e.g., India, Israel)
– Political constraints
Total Spend on Total spend USA NATO Rest of
and alignments
military products in on products in excluding World
purchases which Denel which Denel USA
does not participates
participate

100% 53% 47% 23% 9% 15%

* FY2000 awards
Source: Forecast International; World bank; team analysis
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BUDGETS ARE DECREASING AND MARKET REQUIREMENTS ARE
SHIFTING MAKING IT HARDER TO COMPETE IN THE TRADITIONAL
PLATFORM SALES BUSINESS

Source: McKinsey (2009)

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EMERGING POWERS ARE SHOWING THE HIGHEST INCREASE IN
DEFENCE SPEND – COMPETITION TO INTENSIFY IN DEVELOPING
MARKETS

Source: IIS (2007) and McKinsey

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 The SA Defence Market

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SOUTH AFRICA IS SUB-SCALE FOR SUPPORTING A BROAD DEFENCE
INDUSTRY

Equipment spend
Defence equipment Percent of total
budget 2005 defence expenditure Defence spend
US$ Billions (2005) Percent of GDP

US 123.3 24.5 4.0

France 12.4 26.8 2.2 • Overall spend

too low to
China 11.9 31.5 1.7 sustain
complete range
UK 11.2 20.2 2.5 of capabilities
India 8.4 41.0 2.6
• Only China,
Russia 4.0 2.7 India, Russia
19.0
can support
Turkey 3.1 29.8 2.9 defence
industry on
Eqypt 1.4 58.3 2.6 mid-low GDP
RSA 1.2 1990: 2.2 37.0 1.4

Source: Economist intelligence unit, The International Institute of Strategic Studies, SIPRI; military expenditure database, SIPRI; yearbook 2006, HSS; military balance

Source: McKinsey (2007)

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DEFENCE EQUIPMENT SPEND IS LIKELY TO CONTINUE TO DECLINE

DEFENCE SPEND AS % GDP

1.70%
1.60%
1.50%
% GDP

1.40%
1.30%
1.20%
1.10%
1.00%
00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12

YEARS

Defence equipment expenditure will come under further pressure due

to the recent R1,9bn cut and increased personnel and deployment costs

Source: DOD (2009)

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 Denel’s Turnaround Strategy

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DENEL RAN INTO FINANCIAL DIFFICULTIES IN 2005

Losses • Denel was set-up in 1992 with a capital of

R2 billion.
500
0 • The company posted significant losses
-500
Rm

year on year since 1998, except in 2001

-1000 when it posted R40 million profit owing
-1500
-2000 to a once off pension fund holiday. Losses
from 2005 to 2008 caused by:
2001 2002 2003 2004 2005 2006 2007 2008
• Loss of export markets
Cash utilised • Inadequate orders resulting in under-
utilisation of labour and facilities.
200 • High interest cost resulting from
loans.
-300
Rm

• Loss making contracts – Umkhonto,

-800 Raptor, UAV’s, Airbus, Agusta &
Rooivalk.
-1300 • Equity partnership restructuring
2001 2002 2003 2004 2005 2006 2007 2008 starting to have effect from 2007.
• Reserves and capital were significantly
Solvency eroded due to these loses by 2004,
necessitating a review and change of the
2000 strategy in 2005/06.
1500
1000
Rm

500
0
-500
2001 2002 2003 2004 2005 2006 2007 2008

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DENEL DEVELOPED THE TURNAROUND STRATEGY IN 2006:
ALIGNMENT WITH THE DOD AND ON-GOING REFINEMENT IS
CRITICAL
Change drivers Implications for RSA and Denel

– SA now plays a major role as a peacekeeper in the Rest of Africa

– Troop mobility and landward renewal expected to be priority for the DoD
Changing nature of – SA industry plays a major role in supplying equipment for peacekeeping
conflict – Need to focus on growth pockets in traditional manned platform business, fire power
support, munitions and log/maintenance support

– Need for alliances and partnerships with global original equipment manufacturers
Decreased SA defence (OEMs) in certain segments
spend and – DoD will need to prioritise capabilities and focus spend on strategically essential
inaccessible global capabilities
markets – Assist the DoD in maintenance and procurement saving

– SA and Denel well positioned with Brazil eg A-Darter missile development

– India impasse needs to be resolved
Emerging powers
– Pursue technology transfer to access growing markets

– SA has exceptional design and engineering skills

– Significant demand for unmanned platforms (UAVs) – pursue growth in this area
Shifts in technology – Level 5 systems engineering skills will be critical for the future
– Explore other high tech areas eg. physical/digital security

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DENEL’S STRATEGY SET OUT TO INCREASE MARKET ACCESS,
OVERHAUL GOVERNANCE AND TRANSFORM THE COMPANY

Denel Corporate Office – managing 11 Focus on growing the commercially

viable businesses where Denel has
real technological leadership.
Secure privileged
access to a minimum
portion of South
created Entities Denel’s other businesses will be ring-
fenced, operated under management
Africa’s defence contracts or exited
development and
procurement spend
Denel Corporate Governance

Grow Commercially
Partner with State

Viable Businesses
Privileged Access

Strategic Equity

Capabilities and
Raise capabilities and
productivity to world-

Productivity
class levels
Agencies

Partners
Partner with State
Agencies to do joint
business planning and
to establish export
marketing
responsibilities. These
two factors translate
into the ‘captive
People and Transformation
market’ and ‘political
support’ that make

Denel Corporate Office Purpose – “The

international major Secure equity business
defence prime partnerships with major
contractors successful global players
Role of the Centre”
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SINCE THE LAUNCH OF THE STRATEGY IN 2005, DENEL HAS
MADE SIGNIFICANT PROGRESS WITH IMPLEMENTATION

• Denel operations restructured and ring-fenced to isolate risk and drive performance and accountability at
business unit level

• Governance policies, systems and processes strengthened across Denel - this will continue to be
prioritised

• Entity Boards and Audit and Risk Committees established

• Disposed of non-core businesses and properties to the value of R1bn

• All businesses have turned around except for Missiles and DSA. Denel Integrated Support Systems
(DISS) remains a risk area until the Ground Based Air Defence System (GBADS) 2 contract has been
secured

• Denel local / export sales mix changed from 40/60% to 60/40%

• Major DoD contracts secured include:

– Hoefyster (Badger) Infantry Fighting Vehicle (total R8,3bn, R1,1bn development contract
activated at this stage)
– A-Darter 5th generation air-to-air missile development (R1,1bn: RSA and Brazil funded)
– Aircraft maintenance, repair and overhaul (R600m per annum)

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SINCE THE LAUNCH OF THE STRATEGY IN 2005, DENEL HAS MADE
SIGNIFICANT PROGRESS WITH IMPLEMENTATION (CONTD.)

• Cooperation established with all RSA State Agencies and more being done to further improve
situation – major focus on improving DoD relationship underway

• Three equity partnerships concluded with Carl Zeiss Optronics (Germany), Rheinmetall Defence
(Germany) and SAA AB (Sweden). All equity partnerships showing a rapid turn around and
significant export orders, except for Denel SAAB Aerostructures (DSA)

• Specific aggressive turnaround intervention launched at DSA

• Proactive technical management at Group level with successes achieved in the Ground Based Air
Defence System (GBADS) programme, A-Darter and the C-130 and Oryx aviation programmes

• Transformation:
– Drive launched in 2007
– Transformation committees established in each entity to drive programmes
– Key part of entity stretch targets (management incentive programme)
– Organisational climate index score of 50 (SA corporate benchmark score = 60) in 2008 for the
Denel Group
– Major emphasis on bursary, internship and youth training programmes

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DENEL RECENTLY REFINED ITS STRATEGIC DRIVERS TO ENSURE
INCREASED FOCUS ON CUSTOMERS, EFFICIENCY AND GROWTH

Improved Access to Sustainable Markets

Equity Partnerships: Existing and New
Local Spend: Home Market Support

Operational Excellence
CUSTOMER FOCUS
Performance, People, Skills Development, Outsourcing, Supplier
Development

Deepen Relationship with DoD and State Agencies EFFICIENCY

Joint planning, International Marketing Support, Technology and
IP Development, Skills Transfer, Programme Delivery

GROWTH
Strengthen Governance and Financial Management
Risk Management, Compliance, Cash Flow Management and
Contracting

Towards a Respected South African Company

Transformation, BBBEE, CSI, Branding

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DENEL HAS ALSO DEVELOPED CORPORATE VALUES TO
UNDERPIN THE DRIVERS AND THE ORGANISATION

Integrated multi-
disciplinary
approach to
address culture,
ethics, work
practices and

Implementation
drive public
awareness
through internal
and external
stakeholder
engagement

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 Denel Priorities

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KEY PRIORITIES MUST BE IMPLEMENTED TO COMPLETE
THE TURNAROUND

•Denel’s funding guarantees/recapitalisation

•Execute growth strategy

– Finalise End State proposals
– Achieve transformation goals
– Strong political support for exports
– Leverage SEP/Alliances to grow exports

•Interventions to ensure commercial viability

– Measures to reduce working capital requirement
– Build order cover and multi-year orders: local and international

•Denel’s missiles business

– Conclusion of the equity negotiations with the global missiles company

•Denel SAAB Aerostructures:

– Turnaround drive underway

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 Thank You

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