Thursday, 25 August 2011

The Egyptian Defense Industry - Market Opportunities and Entry Strategies, Analyses and Forecasts to 2015

Growth of the Egyptian Defense industry is expected to be driven by the increased internal stability of the country following the political unrest and resultant need for modern military hardware, maintenance and support.

London - 25 August 2011 - The Egyptian defense industry is dominated by US manufacturers as a result of the US$1.3 billion Egypt receives annually through US Foreign Military Financing (FMF). This military aid must be spent on US-made products and is also a financial incentive for Egypt not to attack Israel, its closest neighbor. With this agreement in place since the Camp David Egypt–Israel peace treaty of 1979, Egypt has thus far received approximately US$40 billion through US FMF. This reliance on US-made technology has left the country’s domestic defense manufacturers struggling with exports negligible from 2006 to 2010.

Seeking to counter this decline, the Egyptian Government favors license manufacturing and technology transfer agreements and this is a key entry route for foreign manufacturers challenged by the lack of transparency in the industry. From 2011 to 2015, growth of the Egyptian defense industry is expected to be driven by increased procurement for all armed forces.

Defense Expenditure to record a CAGR of 0.89% in the forecast period
The Egyptian defense industry, which valued just over US$4.5 billion in 2010, is expected to record a CAGR of 0.89% over the forecast period and value approximately US$4.8 billion by 2015. Egypt is expected to allocate 2% of its GDP for defense expenditure during the forecast period, despite its relatively small economy, although this may change given the political uprising and subsequent downturn in the country’s economy.

Procurement of new defense systems and maintenance and support for existing equipment to drive the Egyptian defense market
Egypt is expected to procure equipment to strengthen all branches of its armed forces. Procurements expected to be made during the forecast period include attack , transport and maritime patrol aircraft, attack and cargo helicopters, various weapon systems including anti-tank, anti-ship, air-to-air missiles and rockets, unmanned systems, command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR) equipment, and engines, maintenance and support for the country’s existing aircraft fleet. The navy has recently signed contracts for fleet maintenance and support and a procurement contract for the delivery of four patrol boats called Fast Missile Craft (FMC). The air defense force has also been vigorously modernizing its Soviet air defense systems during the review period. As most of these systems are old, fleet wide upgrading and new procurements are expected to continue in the forecast period.

Egypt relies heavily on the US for its defense procurement
Egypt is currently undergoing a major political upheaval and the outcome of this period of change is expected to shape the domestic and foreign policies of the country in the forecast period. Consequently it will also have a major impact on the country’s defense policy. The country signed the US-brokered Camp David peace accord in 1979 and was assured Foreign Military Financing (FMF) of US$1.3 billion per year from the US. Egypt has thus far received FMF amounting to nearly US$40 billion through which it has replaced most of its Soviet-made inventory with US-made equipment. Provided a liberal democracy evolves in Cairo, the FMF to Egypt is expected to continue and make up 80% of the country’s capital expenditure, making the US the country’s major arms supplier. Other major suppliers to Egypt include China, Germany, France, the UK and Russia. Exclusive of US FMF, Egypt is expected to spend just over US$23.4 billion on defense in the forecast period.

Military prioritizes license manufacturing and technology transfer
Egypt’s domestic defense industry is completely controlled by the military through the Ministry of Military Production and the presence of private and foreign companies is seen as a threat to the country’s national interest and security. The main customers of Egyptian defense manufacturers are the country’s armed forces due to the limitations placed on the industry by a lack of advanced weapons manufacturing capabilities and international export sanctions placed on former customers such as Iraq. Egypt’s defense industry is also characterized by low R&D spending and a focus on labor-intensive manufacturing products. Egypt’s military industry base aims to develop the country’s defense industry by agreeing license and technology transfer agreements with foreign companies, meaning that non-domestic firms often enter the market through government-to-government deals.

Historically, US defense firms have entered the Egyptian defense industry through government initiated foreign military financing initiatives. Furthermore, Egypt’s preference for manufacturing of defense systems through license agreements has resulted in a number of production activities with Chinese, German and French companies in fields such as trainer aircraft and anti-tank missiles.

Unstable political system and lack of transparency key challenges for foreign OEMs
The recent political unrest and the uncertainty surrounding the political outcome makes the Egypt defense industry an unattractive market for foreign OEMs, a situation compounded by the dominance of the industry by US firms as a result of the FMF agreement between the two
countries. Another factor discouraging foreign firms is the lack of transparency within Egypt’s military establishment regarding defense budgets and weapons procurement plans.

To purchase the full version of the report, “The Egyptian Defense Industry - Market Opportunities and Entry Strategies, Analyses and Forecasts to 2015,” please click here.

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