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Inside Denel’s herculean plan to turn its fortunes around within five years

Soldiers on the Denel-manufactured Rooikat armoured reconnaissance vehicles. (Photo: EPA-EFE / Kim Ludbrook) | A member of the SANDF holds the SS77 general-purpose machine gun manufactured by Denel. (Photo: EPA / Nic Bothma) | The South African Air Force Silver Falcons display team flies at the African Aerospace and Defence expo at the Waterkloof Air Force Base, Pretoria. (Photo: EPA / Kim Ludbrook)

The state-owned arms manufacturer Denel plans to sell non-core and unprofitable assets and make big changes to its business model. But it also wants to approach the SA taxpayer with a begging bowl.

Denel has unveiled a turnaround strategy that it believes could help the cash-strapped, state-owned arms manufacturer return to profitability and become a sustainable business within five years. 

But there’s a caveat: the turnaround strategy can only work if the government agrees to throw a taxpayer-funded bailout to Denel. 

Since the early 1990s, Denel has been at the centre of innovation in SA as it manufactures air-to-air missiles, stand-off weapons, surface target missiles, air defence and unmanned aerial vehicle systems. Markets in Asia, Europe, North America and the Middle East once relied on Denel for the supply of artillery and armoured vehicles.

But today, Denel’s financial crisis is so serious that it hasn’t paid full salaries to its more than 2,500 workers since April 2020. The company struggles to service its total debt of R3.6-billion and has failed to fulfil orders from customers. 

A count by Business Maverick shows that from 2017 to 2020, Denel has recorded R7.1-billion in financial losses, received R2.8-billion in government bailouts, and had six permanent CEOs and three acting CEOs. Denel’s governance has been further weakened by the appointment of compromised individuals on its board — appointments were allegedly influenced by members of the Gupta family under the stewardship of former Public Enterprises Minister Lynne Brown. This script has also played out at state-owned enterprises (SOEs) including Eskom, SAA and many others. 

The turnaround plan 

William Hlakoane, the acting CEO, believes that with time, money and efforts by management to change Denel’s business structure, the company can turn its fortunes around. 

The five-year turnaround strategy will also involve the sale of yet-to-be-determined noncore, or unprofitable assets, which Denel conservatively estimates will realise about R1.5-billion over the next five years. 

But this will be difficult because some of Denel’s assets have deteriorated due to neglect and realising value from them will be a herculean task. For example, during its investigation into Denel, the Special Investigating Unit found that the intellectual property for some of Denel’s highly sought-after missiles was stolen in 2018 by unnamed current and former workers and allegedly given to Saudi Arabian Military Industries (SAMI). Without the intellectual property, it is no longer a secret how Denel manufactures artillery and armoured vehicles, paving the way for competitors such as SAMI to take lucrative contracts away from it. 

Hlakoane — a qualified engineer with more than two decades of experience in rail, transport, logistics, energy, mining and defence industries — has acknowledged the enormous task of having to find suitors for Denel’s assets.  

“We do acknowledge that it will take some time to sell these assets while the payment of legacy debt and the requirements for liquidity are immediate,” he said. 

To fix Denel’s liquidity crisis and spruce up its assets ahead of their potential sale, Hlakoane said Denel requires “significant cash injections” from the government. He didn’t disclose how much in cash injections Denel requires. 

“We are encouraged by the unwavering support that we have been receiving from our shareholder, the Department of Public Enterprises. This is underlined by its acknowledgement that there is a need to assist Denel with regards to its financial situation,” he said in a statement. 

“Thus, I am positive that the discussions with other government departments that have [a] keen interest in Denel’s survival, such as the Department of Defence and the National Treasury, will soon bear positive results.” 

But the Treasury has resisted requests for more bailouts to help financially distressed SOEs as it wants to cut government expenditure and ballooning debt.  

Other components of the Denel turnaround strategy include changing its business model by reducing its current operating divisions from six (Denel Aeronautics, Denel Dynamics, Denel Land Systems, Denel Vehicle Systems, Denel Overberg Test Range and Pretoria Metal Pressings) to two. One division will focus on engineering and the other on manufacturing and maintenance. Reducing or merging the divisions is aimed at eliminating redundancies and costs in areas such as supply chain management, human capital, IT and finance, said Hlakoane. 

Denel’s engineering division will merge all the company’s capabilities in artillery, infantry and vehicle systems, its missile and precision-guided munitions business, as well as its management of complex integrated systems. 

“It will drive the company’s diversification of technology into existing and new markets in fields such as command and control, cybersecurity and communications while researching and developing new technologies of the future.”

The maintenance and manufacturing division will focus on aeronautics, unmanned aerial vehicle systems and the production of small- and medium-calibre ammunition, as well as the production of combat vehicles.

Not only does Denel require financial support for the turnaround strategy to work, but it also needs people. In recent months, Denel has faced an exodus of highly skilled workers who grew fed up with not being paid full salaries. DM/BM

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All Comments 9

  • Denel’s problems haven’t arisen overnight. Why weren’t loss making and non-core assets not disposed of long ago?
    What is the cost of re-structuring? It may well be better to use tax payers money to capitalise a public/private partnership to acquire the assets without the historic baggage.

    • Absolutely agree….they’ve already sold off their top prize to the Saudi so nothing much left anyway. Just looking to the taxpayer to cover their salaries. If it has potential then sell it off to private enterprise. I suspect this is not an option because there is nothing to sell apart from racist BEE agreements and a tax loss after it’s looting by Zuma and his mates. SA is no longer the powerhouse it was so get over it and sell off or abandon the ego trip that is Denel and SAA ( for starters!)

  • Just give us a couple of billion and we’ll give you a million in ten years. Yes likely, last time they needed R1,8 billion to make them totally self sufficient and now they’re begging again. Maybe ask Dudu and the Gupta’s where the royalty fees are. President CR said his lips are sealed but his money is safe. OK so FU like you do to us.

  • There is no more any prospect of turning Denel around, no more opportunity of saving Denel. Far too many technical experts have been lost, forced out through inept management, through failure to pay salaries and, yes, also through transformation.

    When I left Denel in 2013, after more than 20 years service, I saw the writing on the wall. My anticipated timeline was out a little, but most of what I foresaw has materialized – mostly because incapable managers were appointed beyond their capabilities, to transform the company. They did transform the company, into a cesspit.

    Let’s be realistic, please. Denel is lost and should be closed rather than wasting more tax-payer money on this lost cause.

    A very sad day has arrived.

  • Close it down – if our country really needs killing machines, it can buy them on the open market, probably much more cheaply too.
    Rather concentrate on manufacturing and exporting things which are of benefit to humanity, not designed to destroy lives. How about nutrition, education, healthcare, energy, infrastructure, construction, housing etc?

  • The problem isn’t money. Denel was broken the same way all SA’s other SOE’s were broken, through cadre-deployment and patronage. Whatever “grand-plans” and “new strategies” Denel may present, it is lunacy to think “more money” will suddenly make tainted individuals brighter, more competent more honest, or at least less corrupt. Cadre-deployment and patronage are the heartbeat of the ANC. The obvious fact is that for as long as the ANC remains in power, these twin disasters will continue to wreak havoc on SA’s economy, disemboweling any hope of “a better future for all”. Changing the appointment mechanism and opening it up for public scrutiny where an independent and non-political board makes the senior management appointments would be a good first step in solving this problem.

  • The problem isn’t money. Denel was broken the same way all SA’s other SOE’s were broken, through cadre-deployment and patronage. Whatever “grand-plans” and “new strategies” Denel may present, it is lunacy to think “more money” will suddenly make tainted individuals brighter, more competent more honest, or at least less corrupt. Cadre-deployment and patronage are the heartbeat of the ANC. The obvious fact is that for as long as the ANC remains in power, these twin disasters will continue to wreak havoc on SA’s economy, disemboweling any hope of “a better future for all”. Changing the appointment mechanism and opening it up for public scrutiny where an independent and non-political board makes senior management appointments would be a good first step in solving this problem.

  • Talk about flogging a dead horse. How about starting with the recovery of the R1m+ they shelled out for Magashule’s son to take flying lessons?

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