In April 2016, Saudi Arabia announced ambitions to source half of its defense requirements from domestic suppliers as part of sweeping industrial and innovation reforms to secure the Kingdom's economic future, known as Saudi Vision 2030. Similarly, other GCC countries have made headlines with notable investments in defense-focused development organizations (e.g., Emirates Defence Industries Company) and technology cities (e.g., Qatar Science and Technology Park). Such efforts are not limited to a select group of hydrocarbon-focused economies. Across the Middle East and North Africa (MENA) region, countries intend to harness defense and aerospace technology procurements to build and strengthen their industrial base through significant investments and ambitious policies.

While industrial participation programs in MENA are not a new concept, the precipitous decline in global oil prices has brought forward an urgent emphasis on policies encouraging economic growth and economic diversification. Whereas historically, foreign firms benefited from inconsistent enforcement of offset obligations or their singular focus on employment, technology transfer and localization of capabilities are a precondition for many large defense sales in the prevailing economic climate. Partnerships and joint ventures between western OEMs and MENA firms are increasingly common, with each headline describing the litany of expected economic benefits, from high-paying jobs to the emergence of new high-tech sectors.

Creating opportunities

Despite a marked effort to create and support local industries, most countries report uneven results. Governments largely defer to prime defense integrators and OEMs to determine which aspect of work to onshore and which technology to transfer. Unsurprisingly, global companies seek to limit disruptions to their global supply chains by eschewing meaningful technology transfer. When governments do successfully negotiate for local workshare, the result is often the creation of orphan industries that cannot compete globally and must subsequently depend entirely on government subsidization to stay afloat.

So where does this leave governments across the region? It will come as no surprise to those involved in negotiating international defense sales that OEMs are reluctant or unable to give up valuable IP or significant workshare, often originally funded by their home governments. Yet the MENA market is so substantial ($600B over the coming decade) that governments are in a unique position to negotiate for valuable workshare, especially if they can prioritize the specific market segments to target through indigenization and technology transfer.

Acknowledging the direct benefits of strategic industrial policies for Middle Eastern governments, international primes and OEMs can also benefit. OEMs that invest in meaningful capability in-country establish a strong position and customer intimacy for future contract pursuits, thereby minimizing business development and capture spend. Business and economic advantages, to include lower labor and energy costs should not be discounted either. These efforts, however, occur within an evolving geopolitical and trade context, with governments worldwide seeking to "bring home" jobs and technology. Defense industrial policies that emphasize mutual gains for both host and foreign OEMs are best positioned for success; those that ignore broader considerations are likely to face political, regulatory, and other hurdles.

Data-driven industrial policy

With all this in mind, what needs to change for MENA governments to focus their defense industrial policy agendas? It is not a lack of political will but a lack of data that has limited governments' abilities to strategically prioritize market areas. At its most basic, industrial policy is predicated on thoroughly understanding the composition of a country's industrial base, as well as how it compares to its peers and neighbors. Beyond that, achieving a granular view of current and future global defense spending and technology trends is critical to crafting policy that enables a country's local industry to be successful beyond its own borders. Equipped with robust data and analysis, both governments and global OEMs can take the requisite steps to optimize their respective returns from international sales.

The MENA market shows there are enormous long-term opportunities for governments who view data-driven industrial policy as a viable lever to channel defense spending toward economic growth, maintaining interoperability with allies, and ensuring surety of supply. Partnership with industry is a cornerstone of that success, with a new generation of joint endeavors delivering local defense capabilities, economic and social benefits, from sustainable high-paying jobs to the emergence of new technology. dn

Aleksandar Jovovic is a principal, Alec Sorensen is a consultant, and Nico Dona dalle Rose is a senior analyst at Avascent, a leading global consulting firm. They can be reached at ajovovic@avascent.com, asorensen@avascent.com, ndonadallerose@avascent.com, respectively.