8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

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8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 2102GCC Defense Offset Programs The Trillion-Dollar Opportunity

The Gulf Cooperation Council (GCC) countriesmdashBahrain Kuwait Oman Qatar Saudi Arabia

and the United Arab Emiratesmdashtogether spend nearly 983076983096983088 billion a year on defense ranking the

region third among the worldrsquos biggest defense spenders behind the United States and China983089

At more than 983076983092983096 billion a year Saudi Arabia leads the GCC countries in defense spending

(see figure 983089)

The real significance of these expenditures goes beyond their massive totals They signal a

unique growth opportunity for the regionrsquos manufacturing and knowledge sectors Consider

this Between 983090983088983089983091 and 983090983088983090983093 GCC countries will have spent about 983076983089 trillion on defense and

roughly 983091983088 percent of this is dedicated to capital expenditures If a 983091983093 percent offset require-

ment is enforced this means a whopping 983076983089983088983093 billion could be either reinvested or sourced

domestically creating more than 983090983096983088983088983088983088 advanced jobsmdash983096983092983088983088983088 in Saudi Arabia alonemdashandan opportunity to build sustainable value chains in the regionrsquos nascent aerospace automotive

and marine sectors Because these opportunities have gone largely untapped defense offset

programs are essential to tapping them983090

Around the world defense offset programs have drawn criticism because of inconsistencies

in generating economic value Indeed transferring knowledge and technology to boost

manufacturing information communications technology (ICT) or other industries in recipient

countries can be tricky Yet it can be done with the right incentives in place for the various

participants Exporting countries want to keep jobs contractors want to maintain control

of intellectual property and recipient countries want to remove barriers to building industrialecosystemsmdashimproving prepared human capital pools supply chains and ancillary servicesmdash

to take advantage of the opportunity

1 Stockholm International Peace Research Institute (SIPRI)

2 An offset program is a mechanism to compensate the local industry for foreign purchases and to offset the effects of that purchase on

the trade balance of a country More precisely it is the practice of requiring foreign contractors that receive government contracts to

contribute to the local economy

Figure

Saudi Arabiarsquos military budget is the highest in the GCC

( billion)

AT Kearney estimate based on data Stockholm International Peace Research Institute (SIPRI)

Sources SIPRI AT Kearney analysis

UnitedStates

China GCC SaudiArabia

UnitedArab Emirates

Kuwait Oman Qatar Bahrain

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 3103GCC Defense Offset Programs The Trillion-Dollar Opportunity

Aligning these incentives and overcoming other challenges takes more than well-orchestrated

combinations of offset policies and national strategies It requires business pragmatism and

active incentive management to bring together the interests of the public and private sectors

and of the exporting and recipient countries

Mixed OutcomesOffset programs in the GCC have produced defense and non-defense companies but with

varying degrees of success In past years major GCC offset programs have focused on indirect

offsets mainly through off-the-shelf purchases capital investments and joint ventures in civilian

sectors (electronics pharmaceuticals petrochemicals healthcare education shipbuilding

aquaculture and aircraft MRO) Direct offsets have also been tapped but it is too early to gauge

their degree of success

The point is clear There is a sizable oppor-tunity to maximize the commercial andeconomic impact of offset ventures andthereby better support the GCC nations

hyperspeed growth

For example according to Saudi Arabiarsquos Economic Offset Program (EOP) by the end of 983090983088983088983094

983091983094 companies had been established with a total capitalization of 983076983092983093 billion However these

figures pale in comparison with the military capital expenditures of 983076983089983093983088 billion between 983089983097983096983096 and

983090983088983088983094 or 983076983092983093 billion to 983076983093983093 billion in offsets due to the enforcement of a 983091983093 percent requirement983091

On the employment front EOP reports the creation of about 983094983093983088983088 jobs or 983089983090983088 to 983089983093983088 advanced

jobs for every 983076983089 billion in contract value Comparing this to ratios of average foreign direct

investment (FDI) to advanced employment reveals that an additional 983095983093983088 to 983090983094983088983088 jobs per983076983089 billion spent could be created

The differences in value and job creation can be partly explained by multipliers in offset calculation

but the point is clear There is a sizable opportunity to maximize the commercial and economic

impact of offset ventures and thereby better support the GCC nationsrsquo hyperspeed growth

Conflicting InterestsA number of GCC offset companies face a common pitfall They maintain a contract manufac-

turing view of their operations and in doing so miss the opportunity to expand beyond fulfilling

the original offset obligation be it the manufacturing of a particular subsystem the MRO of

a particular type of equipment or the maintenance of a software solution High reliance on a

particular system or platform renders the offset company unable to compete in other market

segments after fulfilling its offset obligation

3 SIPRI AT Kearney analysis 983090983088983089983091

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

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8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 510

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 6106GCC Defense Offset Programs The Trillion-Dollar Opportunity

Offset programs vary widely hellip What

successful offset programs have incommon however is their ability toaddress three nagging issues

Offset programs can play a vital part in accelerating this evolution but there is no one-size-fits-

all set of measures that will guarantee success From Japan banning technology re-exports to

Turkey actively integrating into original equipment manufacturer (OEM) supply chains offset

programs vary widely in the strategies they follow the policies they enforce and the technology

niches they develop (see sidebar What Worked in South Korea Turkey and Japan on page 983095)

What successful offset programs do have in common however is that they effectively address

three nagging issuesmdashthe ones the GCC countries face today in the strategies chosen the

enablers developed and the ways in which deals are executed (see figure 983092)

983089 Securing technology transfer Technology transfer ensures that value created goes beyond

just financial transfers Countries achieve it by creating incentives for OEMs to transfer niches

Notes CISTAR is command control communications computers intelligence surveillance target acquisition and reconnaissance

KPIs are key performance indicators

Source AT Kearney analysis

Figure

Success factors for defense offset programs

Integrationbull Ensure interoperability Empower a strong high-level agency to orchestrate ecosystem integrate offsets with national

defense industrial strategy and other national efforts actively manage performance and recommend updates to policy

Strategybull Connect strategies Create a national

defense industrial strategy coherent

with and leveraging civilian nationalstrategies and programs

bull Deine winning scenarios Preparefor an uncertain future (for exampleself-suiciency on a platformC4ISTAR systems export leadership)

bull Choose battles Determine valuechain starting points and expandto defense and civilian adjacenciesunder a clear timeline aligned

with national defense-capabilitybuilding plans

bull Adapt to terrain Tailor approachto national priorities strengths and

weaknesses (for example focus on

areas requiring self-suiciencyproximity or localization)

Enablersbull Orchestrate the ecosystem

Establish and manage a complete

ecosystem of public and privatesector institutions

bull Technology innovation RampD

Secure technology ldquoseedrdquo andco-fund RampD in target sectors toexpand it

bull Build talent pool Implement jointHR development programs to furthertechnical and commercial talentpool for targeted skills

bull Establish conducive regulation

Enforce intellectual propertyprotection and other legalframework as necessary

bull Create clusters Develop dedicated

industrial clusters with supplychain-friendly infrastructure and

facilities

Executionbull Address risks of buyers Find

practical ways to hedge risks of

buyers (for example 50 percentdomestic 50 percent international)

bull Nurture start-ups Pragmatically alignvendor and local partner interests

mdash Clear timelines goals KPIs

mdash Additional subsidies in early years

mdash Additional credits for expansioninto adjacent spaces

bull Create national champions

Build from established base to

mdash Transfer codiied technologyand licenses

mdash Integrate with global OEMsupply chains

mdash Develop OEM exit strategies

(reducing equity holdings over time)bull Manage portfolio Maintain

coherent venture portfolio with

strategy and country priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 7107GCC Defense Offset Programs The Trillion-Dollar Opportunity

of technology through licensing or co-production The key is to create enablersmdasha talent pool

RampD sponsorship taking advantage of established industrial playersmdashthat allow the sector to

not only assimilate but also commercialize the technology

983090 Fostering win-win joint venture (JV) dynamics There are three main components to thisFirst the JV ownership structure must create an incentive for the venture to expand to value

chain adjacencies innovate and create value for shareholders The local partner must have

an incentive to develop and manage long-term capabilities as opposed to focusing only on

short-term dividends An ownership structure in which the OEM eventually exits can create

such an incentive Second government support in the form of financial investments talent

supply and RampD is vital Third an ongoing working relationship with international partnersmdash

through co-marketing efforts for examplemdashcan create win-win opportunities for all partners

local and international

What Worked in South Korea Turkey and Japan

South Korea Turkey and Japan

successfully developed defense-

industry sectors Their stories

reveal instructive examples of

what workedmdashand what

ultimately did not

South Korea Acquiring top-tier

military technology and initiating

local manufacturing form the

cornerstone of South Korearsquos

industrial policy With its

burgeoning economy and

growing defense budget South

Korea has transformed its 983089983097983095983088s

nascent defense sector to one

that designs develops and

manufactures a full range of

leading-edge weapons systems

South Korearsquos defense industryprovides more than 983095983088 percent

of its own domestic needs and is

a leading exporter The country

employed its civilian industrial

base US and Japanese tech-

nological assistance and a

motivated workforce to form

the basis of its offset program

The strategy not only produced

government-backed strategic

joint ventures but also trainedhundreds of Korean engineers

secured the right management

control policies and facilitated

joint global marketing efforts

with defense partners

Turkey Following an arms

embargo in the 983089983097983095983088s Turkey

set out to build a self-sufficient

indigenous defense industry

thereby reducing dependence on

foreign arms procurement and

in time becoming an exporter

To this end the country imple-

mented rigorous policies to

support RampD in aerospace and

ICT niches consolidated

decision making and brought

together strong players Today

Turkey is a global player

partnering with industry giants

to develop systems such as

the T-983089983090983097 helicopter (with

AgustaWestland) the F-983091983093

fighter (with Lockheed Martin)

the A983092983088983088M transport aircraft(with Airbus) and Type 983090983089983092

submarines (with HDW) Turkey

has since integrated government

authorities with leading domestic

firms RampD houses educational

institutions subcontractors and

financing entities

Japan Since the early 983089983097983094983088s

Japan has used technology

cross-selling to bring domesticcivilian companiesmdashled by large

conglomerates such as

Mitsubishi Kawasaki and

NEC Corpmdashinto the defense

sector contributing to the

development of the countryrsquos

aerospace electronics telecom

and automotive industries

From 983089983097983093983088 to the early 983089983097983096983088s

Japan grew its defense industry

with the help of 983076983089983088 billion in

advanced technology from the

United States By the 983089983097983095983088s the

country was manufacturing its

own military ground vehicles

artillery and naval vessels with

most under US defense

contractor licenses Japan has

since made notable strides in

aircraft developing the F-983090

fighter jet the P-983089 maritime

patrol and the C-983090 transport

A ban on arms exports to all but

the United States and NATOcountries has prevented Japan

from establishing a strong

presence in the international

defense market Add to this the

countryrsquos declining domestic

military expenditures over the

past 983090983088 years and it does not

bode well for the Japanese

industry In the summer of 983090983088983089983091

however the Japanese Defense

Ministry announced a review ofits decades-old ban auguring

opportunities for national

contractors

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

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983091 Facilitating operational readiness Ultimately concerns about a new company supplying

strategic systems or services must be resolved Assuring that international OEM expertise is

present in the recipient country and then transferring it to the JV is one way to do it Another

is to mandate a JV of an OEM with trusted national champions who have a track record of

delivering It is important to remember this The offset venture must be a true partner of the

armed forces Its leaders understand the client countryrsquos capability requirements long-term

plans to support them and realign to changing priorities when necessary

The most important factor in securingtechnology transfer is the creation of

enablers that allow the sector to not onlyassimilate but also commercialize thetechnology

Applying Lessons Learned

GCC countries can take immediate actions to accelerate their evolution from the seed stageto the export-leadership stage and capitalize on the trillion-dollar opportunity of defense

offset programs The trick is to go beyond the essential strategy to enable the ecosystem and

to execute sustainable deals that engage parties constructively Following are four practical

actions

bull Connect strategies and choose your battles Now is the perfect time for GCC governments

to create national defense industrial strategies that align with civilian national strategies and

programs Applying scenario-based planning to develop these strategies will help countries

succeed in virtually any event in uncertain times It is vital to focus on building specific value

chain areas tailoring the offset policy to national circumstances and to align military with

civilian interests

bull Orchestrate the ecosystem enablers Establish and manage a complete ecosystem of public

and private sector institutions Take an active role in bringing together partners that offer what

is needed to build a true defense industry ecosystem technology acquisition targeted RampD

abundant talent pools favorable regulations that enforce intellectual property protection and

minimize investor risk and a supply chain-friendly infrastructure

bull Execute smartly The execution is where many well-conceived programs falter Smart

execution requires juggling and aligning the interests of all stakeholders deal by deal

It minimizes the risks for military buyers but ensures that economic-development goalsare met It nurtures startups with clear time lines goals and key performance indicators

but takes advantage of national champions and builds new ones It extracts value from

the presence of international OEMs but ensures that local JV partners are pulling their

weight Finally smart execution requires managing the portfolio to maintain coherence

with national priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

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bull Integrate integrate integrate An imperative to capture the value of defense offsets is

integrating defense industrial strategy with other national development strategies and

programsmdashaccomplished by creating a strong agency charged with orchestrating defense

industry strategy monitoring offset-program performance recommending policy changes

and taking part in high-level government decision making

Seizing the MomentGCC countries have a once-in-a-lifetime opportunity to capitalize on their significant invest-

ments in defense over the next decade The window of opportunity may remain open for

decades to come but not seizing the moment today is an opportunity lost

At the national level seizing the moment requires aligning conflicting interests of defense

industry stakeholders It requires accelerating the industry evolution from seed stage to exportleadership It requires government commitment from the highest levels and integrating defense

industry strategy enablers and execution under one roof And it requires the commercially

pragmatic development of direct offset ventures today that can become the national industrial

champions of tomorrow

Regionally seizing the moment means increased collaboration in building capability at a GCC

level and carving out niches in defense industry supply chains And while sharing the task of

building supply chains for different platforms the GCC could collectively create a defense

industry network that secures each countryrsquos specific strategic requirements

There is huge potential to accelerate growth in the GCC defense industries and in turn spur

overall national industrialization It is a trillion-dollar opportunity to create true winners in the

global export race

Authors

Anshu Vats partner

Middle East

anshuvatsatkearneycom

Matthieu de Clercq principal

Middle East

matthieudeclercqatkearneycom

Mauricio Zuazua principal

Middle East

mauriciozuazuaatkearneycom

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 1010

AT Kearney is a global team of forward-thinking partners that delivers immediate

impact and growing advantage for its clients We are passionate problem solvers

who excel in collaborating across borders to co-create and realize elegantly simple

practical and sustainable results Since 983089983097983090983094 we have been trusted advisors on the

most mission-critical issues to the worldrsquos leading organizations across all major

industries and service sectors AT Kearney has 983093983096 o1047296ices located in major businesscenters across 983092983088 countries

Americas

Asia Paci983142ic

Europe

Middle East

and Africa

Atlanta

Bogotaacute

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

Satildeo Paulo

Toronto

Washington DC

Bangkok

Beijing

Hong KongJakarta

Kuala Lumpur

Melbourne

Mumbai

New DelhiSeoul

Shanghai

Singapore

Sydney

Tokyo

Abu Dhabi

Dubai

Johannesburg

Manama

Riyadh

AT Kearney Korea LLC is a separate and

independent legal entity operating under

the AT Kearney name in Korea

copy 983090983088983089983091 AT Kearney Inc All rights reserved

The signature of our namesake and founder Andrew Thomas Kearney on the cover of this

document represents our pledge to live the values he instilled in our 983142irm and uphold his

commitment to ensuring ldquoessential rightnessrdquo in all that we do

For more information permission to reprint or translate this work and all other correspondence

please email insightatkearneycom

Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Duumlsseldorf

FrankfurtHelsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

MoscowMunich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

WarsawZurich

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

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The Gulf Cooperation Council (GCC) countriesmdashBahrain Kuwait Oman Qatar Saudi Arabia

and the United Arab Emiratesmdashtogether spend nearly 983076983096983088 billion a year on defense ranking the

region third among the worldrsquos biggest defense spenders behind the United States and China983089

At more than 983076983092983096 billion a year Saudi Arabia leads the GCC countries in defense spending

(see figure 983089)

The real significance of these expenditures goes beyond their massive totals They signal a

unique growth opportunity for the regionrsquos manufacturing and knowledge sectors Consider

this Between 983090983088983089983091 and 983090983088983090983093 GCC countries will have spent about 983076983089 trillion on defense and

roughly 983091983088 percent of this is dedicated to capital expenditures If a 983091983093 percent offset require-

ment is enforced this means a whopping 983076983089983088983093 billion could be either reinvested or sourced

domestically creating more than 983090983096983088983088983088983088 advanced jobsmdash983096983092983088983088983088 in Saudi Arabia alonemdashandan opportunity to build sustainable value chains in the regionrsquos nascent aerospace automotive

and marine sectors Because these opportunities have gone largely untapped defense offset

programs are essential to tapping them983090

Around the world defense offset programs have drawn criticism because of inconsistencies

in generating economic value Indeed transferring knowledge and technology to boost

manufacturing information communications technology (ICT) or other industries in recipient

countries can be tricky Yet it can be done with the right incentives in place for the various

participants Exporting countries want to keep jobs contractors want to maintain control

of intellectual property and recipient countries want to remove barriers to building industrialecosystemsmdashimproving prepared human capital pools supply chains and ancillary servicesmdash

to take advantage of the opportunity

1 Stockholm International Peace Research Institute (SIPRI)

2 An offset program is a mechanism to compensate the local industry for foreign purchases and to offset the effects of that purchase on

the trade balance of a country More precisely it is the practice of requiring foreign contractors that receive government contracts to

contribute to the local economy

Figure

Saudi Arabiarsquos military budget is the highest in the GCC

( billion)

AT Kearney estimate based on data Stockholm International Peace Research Institute (SIPRI)

Sources SIPRI AT Kearney analysis

UnitedStates

China GCC SaudiArabia

UnitedArab Emirates

Kuwait Oman Qatar Bahrain

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 3103GCC Defense Offset Programs The Trillion-Dollar Opportunity

Aligning these incentives and overcoming other challenges takes more than well-orchestrated

combinations of offset policies and national strategies It requires business pragmatism and

active incentive management to bring together the interests of the public and private sectors

and of the exporting and recipient countries

Mixed OutcomesOffset programs in the GCC have produced defense and non-defense companies but with

varying degrees of success In past years major GCC offset programs have focused on indirect

offsets mainly through off-the-shelf purchases capital investments and joint ventures in civilian

sectors (electronics pharmaceuticals petrochemicals healthcare education shipbuilding

aquaculture and aircraft MRO) Direct offsets have also been tapped but it is too early to gauge

their degree of success

The point is clear There is a sizable oppor-tunity to maximize the commercial andeconomic impact of offset ventures andthereby better support the GCC nations

hyperspeed growth

For example according to Saudi Arabiarsquos Economic Offset Program (EOP) by the end of 983090983088983088983094

983091983094 companies had been established with a total capitalization of 983076983092983093 billion However these

figures pale in comparison with the military capital expenditures of 983076983089983093983088 billion between 983089983097983096983096 and

983090983088983088983094 or 983076983092983093 billion to 983076983093983093 billion in offsets due to the enforcement of a 983091983093 percent requirement983091

On the employment front EOP reports the creation of about 983094983093983088983088 jobs or 983089983090983088 to 983089983093983088 advanced

jobs for every 983076983089 billion in contract value Comparing this to ratios of average foreign direct

investment (FDI) to advanced employment reveals that an additional 983095983093983088 to 983090983094983088983088 jobs per983076983089 billion spent could be created

The differences in value and job creation can be partly explained by multipliers in offset calculation

but the point is clear There is a sizable opportunity to maximize the commercial and economic

impact of offset ventures and thereby better support the GCC nationsrsquo hyperspeed growth

Conflicting InterestsA number of GCC offset companies face a common pitfall They maintain a contract manufac-

turing view of their operations and in doing so miss the opportunity to expand beyond fulfilling

the original offset obligation be it the manufacturing of a particular subsystem the MRO of

a particular type of equipment or the maintenance of a software solution High reliance on a

particular system or platform renders the offset company unable to compete in other market

segments after fulfilling its offset obligation

3 SIPRI AT Kearney analysis 983090983088983089983091

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 410

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 510

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 6106GCC Defense Offset Programs The Trillion-Dollar Opportunity

Offset programs vary widely hellip What

successful offset programs have incommon however is their ability toaddress three nagging issues

Offset programs can play a vital part in accelerating this evolution but there is no one-size-fits-

all set of measures that will guarantee success From Japan banning technology re-exports to

Turkey actively integrating into original equipment manufacturer (OEM) supply chains offset

programs vary widely in the strategies they follow the policies they enforce and the technology

niches they develop (see sidebar What Worked in South Korea Turkey and Japan on page 983095)

What successful offset programs do have in common however is that they effectively address

three nagging issuesmdashthe ones the GCC countries face today in the strategies chosen the

enablers developed and the ways in which deals are executed (see figure 983092)

983089 Securing technology transfer Technology transfer ensures that value created goes beyond

just financial transfers Countries achieve it by creating incentives for OEMs to transfer niches

Notes CISTAR is command control communications computers intelligence surveillance target acquisition and reconnaissance

KPIs are key performance indicators

Source AT Kearney analysis

Figure

Success factors for defense offset programs

Integrationbull Ensure interoperability Empower a strong high-level agency to orchestrate ecosystem integrate offsets with national

defense industrial strategy and other national efforts actively manage performance and recommend updates to policy

Strategybull Connect strategies Create a national

defense industrial strategy coherent

with and leveraging civilian nationalstrategies and programs

bull Deine winning scenarios Preparefor an uncertain future (for exampleself-suiciency on a platformC4ISTAR systems export leadership)

bull Choose battles Determine valuechain starting points and expandto defense and civilian adjacenciesunder a clear timeline aligned

with national defense-capabilitybuilding plans

bull Adapt to terrain Tailor approachto national priorities strengths and

weaknesses (for example focus on

areas requiring self-suiciencyproximity or localization)

Enablersbull Orchestrate the ecosystem

Establish and manage a complete

ecosystem of public and privatesector institutions

bull Technology innovation RampD

Secure technology ldquoseedrdquo andco-fund RampD in target sectors toexpand it

bull Build talent pool Implement jointHR development programs to furthertechnical and commercial talentpool for targeted skills

bull Establish conducive regulation

Enforce intellectual propertyprotection and other legalframework as necessary

bull Create clusters Develop dedicated

industrial clusters with supplychain-friendly infrastructure and

facilities

Executionbull Address risks of buyers Find

practical ways to hedge risks of

buyers (for example 50 percentdomestic 50 percent international)

bull Nurture start-ups Pragmatically alignvendor and local partner interests

mdash Clear timelines goals KPIs

mdash Additional subsidies in early years

mdash Additional credits for expansioninto adjacent spaces

bull Create national champions

Build from established base to

mdash Transfer codiied technologyand licenses

mdash Integrate with global OEMsupply chains

mdash Develop OEM exit strategies

(reducing equity holdings over time)bull Manage portfolio Maintain

coherent venture portfolio with

strategy and country priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 7107GCC Defense Offset Programs The Trillion-Dollar Opportunity

of technology through licensing or co-production The key is to create enablersmdasha talent pool

RampD sponsorship taking advantage of established industrial playersmdashthat allow the sector to

not only assimilate but also commercialize the technology

983090 Fostering win-win joint venture (JV) dynamics There are three main components to thisFirst the JV ownership structure must create an incentive for the venture to expand to value

chain adjacencies innovate and create value for shareholders The local partner must have

an incentive to develop and manage long-term capabilities as opposed to focusing only on

short-term dividends An ownership structure in which the OEM eventually exits can create

such an incentive Second government support in the form of financial investments talent

supply and RampD is vital Third an ongoing working relationship with international partnersmdash

through co-marketing efforts for examplemdashcan create win-win opportunities for all partners

local and international

What Worked in South Korea Turkey and Japan

South Korea Turkey and Japan

successfully developed defense-

industry sectors Their stories

reveal instructive examples of

what workedmdashand what

ultimately did not

South Korea Acquiring top-tier

military technology and initiating

local manufacturing form the

cornerstone of South Korearsquos

industrial policy With its

burgeoning economy and

growing defense budget South

Korea has transformed its 983089983097983095983088s

nascent defense sector to one

that designs develops and

manufactures a full range of

leading-edge weapons systems

South Korearsquos defense industryprovides more than 983095983088 percent

of its own domestic needs and is

a leading exporter The country

employed its civilian industrial

base US and Japanese tech-

nological assistance and a

motivated workforce to form

the basis of its offset program

The strategy not only produced

government-backed strategic

joint ventures but also trainedhundreds of Korean engineers

secured the right management

control policies and facilitated

joint global marketing efforts

with defense partners

Turkey Following an arms

embargo in the 983089983097983095983088s Turkey

set out to build a self-sufficient

indigenous defense industry

thereby reducing dependence on

foreign arms procurement and

in time becoming an exporter

To this end the country imple-

mented rigorous policies to

support RampD in aerospace and

ICT niches consolidated

decision making and brought

together strong players Today

Turkey is a global player

partnering with industry giants

to develop systems such as

the T-983089983090983097 helicopter (with

AgustaWestland) the F-983091983093

fighter (with Lockheed Martin)

the A983092983088983088M transport aircraft(with Airbus) and Type 983090983089983092

submarines (with HDW) Turkey

has since integrated government

authorities with leading domestic

firms RampD houses educational

institutions subcontractors and

financing entities

Japan Since the early 983089983097983094983088s

Japan has used technology

cross-selling to bring domesticcivilian companiesmdashled by large

conglomerates such as

Mitsubishi Kawasaki and

NEC Corpmdashinto the defense

sector contributing to the

development of the countryrsquos

aerospace electronics telecom

and automotive industries

From 983089983097983093983088 to the early 983089983097983096983088s

Japan grew its defense industry

with the help of 983076983089983088 billion in

advanced technology from the

United States By the 983089983097983095983088s the

country was manufacturing its

own military ground vehicles

artillery and naval vessels with

most under US defense

contractor licenses Japan has

since made notable strides in

aircraft developing the F-983090

fighter jet the P-983089 maritime

patrol and the C-983090 transport

A ban on arms exports to all but

the United States and NATOcountries has prevented Japan

from establishing a strong

presence in the international

defense market Add to this the

countryrsquos declining domestic

military expenditures over the

past 983090983088 years and it does not

bode well for the Japanese

industry In the summer of 983090983088983089983091

however the Japanese Defense

Ministry announced a review ofits decades-old ban auguring

opportunities for national

contractors

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 8108GCC Defense Offset Programs The Trillion-Dollar Opportunity

983091 Facilitating operational readiness Ultimately concerns about a new company supplying

strategic systems or services must be resolved Assuring that international OEM expertise is

present in the recipient country and then transferring it to the JV is one way to do it Another

is to mandate a JV of an OEM with trusted national champions who have a track record of

delivering It is important to remember this The offset venture must be a true partner of the

armed forces Its leaders understand the client countryrsquos capability requirements long-term

plans to support them and realign to changing priorities when necessary

The most important factor in securingtechnology transfer is the creation of

enablers that allow the sector to not onlyassimilate but also commercialize thetechnology

Applying Lessons Learned

GCC countries can take immediate actions to accelerate their evolution from the seed stageto the export-leadership stage and capitalize on the trillion-dollar opportunity of defense

offset programs The trick is to go beyond the essential strategy to enable the ecosystem and

to execute sustainable deals that engage parties constructively Following are four practical

actions

bull Connect strategies and choose your battles Now is the perfect time for GCC governments

to create national defense industrial strategies that align with civilian national strategies and

programs Applying scenario-based planning to develop these strategies will help countries

succeed in virtually any event in uncertain times It is vital to focus on building specific value

chain areas tailoring the offset policy to national circumstances and to align military with

civilian interests

bull Orchestrate the ecosystem enablers Establish and manage a complete ecosystem of public

and private sector institutions Take an active role in bringing together partners that offer what

is needed to build a true defense industry ecosystem technology acquisition targeted RampD

abundant talent pools favorable regulations that enforce intellectual property protection and

minimize investor risk and a supply chain-friendly infrastructure

bull Execute smartly The execution is where many well-conceived programs falter Smart

execution requires juggling and aligning the interests of all stakeholders deal by deal

It minimizes the risks for military buyers but ensures that economic-development goalsare met It nurtures startups with clear time lines goals and key performance indicators

but takes advantage of national champions and builds new ones It extracts value from

the presence of international OEMs but ensures that local JV partners are pulling their

weight Finally smart execution requires managing the portfolio to maintain coherence

with national priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 9109GCC Defense Offset Programs The Trillion-Dollar Opportunity

bull Integrate integrate integrate An imperative to capture the value of defense offsets is

integrating defense industrial strategy with other national development strategies and

programsmdashaccomplished by creating a strong agency charged with orchestrating defense

industry strategy monitoring offset-program performance recommending policy changes

and taking part in high-level government decision making

Seizing the MomentGCC countries have a once-in-a-lifetime opportunity to capitalize on their significant invest-

ments in defense over the next decade The window of opportunity may remain open for

decades to come but not seizing the moment today is an opportunity lost

At the national level seizing the moment requires aligning conflicting interests of defense

industry stakeholders It requires accelerating the industry evolution from seed stage to exportleadership It requires government commitment from the highest levels and integrating defense

industry strategy enablers and execution under one roof And it requires the commercially

pragmatic development of direct offset ventures today that can become the national industrial

champions of tomorrow

Regionally seizing the moment means increased collaboration in building capability at a GCC

level and carving out niches in defense industry supply chains And while sharing the task of

building supply chains for different platforms the GCC could collectively create a defense

industry network that secures each countryrsquos specific strategic requirements

There is huge potential to accelerate growth in the GCC defense industries and in turn spur

overall national industrialization It is a trillion-dollar opportunity to create true winners in the

global export race

Authors

Anshu Vats partner

Middle East

anshuvatsatkearneycom

Matthieu de Clercq principal

Middle East

matthieudeclercqatkearneycom

Mauricio Zuazua principal

Middle East

mauriciozuazuaatkearneycom

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 1010

AT Kearney is a global team of forward-thinking partners that delivers immediate

impact and growing advantage for its clients We are passionate problem solvers

who excel in collaborating across borders to co-create and realize elegantly simple

practical and sustainable results Since 983089983097983090983094 we have been trusted advisors on the

most mission-critical issues to the worldrsquos leading organizations across all major

industries and service sectors AT Kearney has 983093983096 o1047296ices located in major businesscenters across 983092983088 countries

Americas

Asia Paci983142ic

Europe

Middle East

and Africa

Atlanta

Bogotaacute

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

Satildeo Paulo

Toronto

Washington DC

Bangkok

Beijing

Hong KongJakarta

Kuala Lumpur

Melbourne

Mumbai

New DelhiSeoul

Shanghai

Singapore

Sydney

Tokyo

Abu Dhabi

Dubai

Johannesburg

Manama

Riyadh

AT Kearney Korea LLC is a separate and

independent legal entity operating under

the AT Kearney name in Korea

copy 983090983088983089983091 AT Kearney Inc All rights reserved

The signature of our namesake and founder Andrew Thomas Kearney on the cover of this

document represents our pledge to live the values he instilled in our 983142irm and uphold his

commitment to ensuring ldquoessential rightnessrdquo in all that we do

For more information permission to reprint or translate this work and all other correspondence

please email insightatkearneycom

Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Duumlsseldorf

FrankfurtHelsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

MoscowMunich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

WarsawZurich

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 3103GCC Defense Offset Programs The Trillion-Dollar Opportunity

Aligning these incentives and overcoming other challenges takes more than well-orchestrated

combinations of offset policies and national strategies It requires business pragmatism and

active incentive management to bring together the interests of the public and private sectors

and of the exporting and recipient countries

Mixed OutcomesOffset programs in the GCC have produced defense and non-defense companies but with

varying degrees of success In past years major GCC offset programs have focused on indirect

offsets mainly through off-the-shelf purchases capital investments and joint ventures in civilian

sectors (electronics pharmaceuticals petrochemicals healthcare education shipbuilding

aquaculture and aircraft MRO) Direct offsets have also been tapped but it is too early to gauge

their degree of success

The point is clear There is a sizable oppor-tunity to maximize the commercial andeconomic impact of offset ventures andthereby better support the GCC nations

hyperspeed growth

For example according to Saudi Arabiarsquos Economic Offset Program (EOP) by the end of 983090983088983088983094

983091983094 companies had been established with a total capitalization of 983076983092983093 billion However these

figures pale in comparison with the military capital expenditures of 983076983089983093983088 billion between 983089983097983096983096 and

983090983088983088983094 or 983076983092983093 billion to 983076983093983093 billion in offsets due to the enforcement of a 983091983093 percent requirement983091

On the employment front EOP reports the creation of about 983094983093983088983088 jobs or 983089983090983088 to 983089983093983088 advanced

jobs for every 983076983089 billion in contract value Comparing this to ratios of average foreign direct

investment (FDI) to advanced employment reveals that an additional 983095983093983088 to 983090983094983088983088 jobs per983076983089 billion spent could be created

The differences in value and job creation can be partly explained by multipliers in offset calculation

but the point is clear There is a sizable opportunity to maximize the commercial and economic

impact of offset ventures and thereby better support the GCC nationsrsquo hyperspeed growth

Conflicting InterestsA number of GCC offset companies face a common pitfall They maintain a contract manufac-

turing view of their operations and in doing so miss the opportunity to expand beyond fulfilling

the original offset obligation be it the manufacturing of a particular subsystem the MRO of

a particular type of equipment or the maintenance of a software solution High reliance on a

particular system or platform renders the offset company unable to compete in other market

segments after fulfilling its offset obligation

3 SIPRI AT Kearney analysis 983090983088983089983091

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 410

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 510

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 6106GCC Defense Offset Programs The Trillion-Dollar Opportunity

Offset programs vary widely hellip What

successful offset programs have incommon however is their ability toaddress three nagging issues

Offset programs can play a vital part in accelerating this evolution but there is no one-size-fits-

all set of measures that will guarantee success From Japan banning technology re-exports to

Turkey actively integrating into original equipment manufacturer (OEM) supply chains offset

programs vary widely in the strategies they follow the policies they enforce and the technology

niches they develop (see sidebar What Worked in South Korea Turkey and Japan on page 983095)

What successful offset programs do have in common however is that they effectively address

three nagging issuesmdashthe ones the GCC countries face today in the strategies chosen the

enablers developed and the ways in which deals are executed (see figure 983092)

983089 Securing technology transfer Technology transfer ensures that value created goes beyond

just financial transfers Countries achieve it by creating incentives for OEMs to transfer niches

Notes CISTAR is command control communications computers intelligence surveillance target acquisition and reconnaissance

KPIs are key performance indicators

Source AT Kearney analysis

Figure

Success factors for defense offset programs

Integrationbull Ensure interoperability Empower a strong high-level agency to orchestrate ecosystem integrate offsets with national

defense industrial strategy and other national efforts actively manage performance and recommend updates to policy

Strategybull Connect strategies Create a national

defense industrial strategy coherent

with and leveraging civilian nationalstrategies and programs

bull Deine winning scenarios Preparefor an uncertain future (for exampleself-suiciency on a platformC4ISTAR systems export leadership)

bull Choose battles Determine valuechain starting points and expandto defense and civilian adjacenciesunder a clear timeline aligned

with national defense-capabilitybuilding plans

bull Adapt to terrain Tailor approachto national priorities strengths and

weaknesses (for example focus on

areas requiring self-suiciencyproximity or localization)

Enablersbull Orchestrate the ecosystem

Establish and manage a complete

ecosystem of public and privatesector institutions

bull Technology innovation RampD

Secure technology ldquoseedrdquo andco-fund RampD in target sectors toexpand it

bull Build talent pool Implement jointHR development programs to furthertechnical and commercial talentpool for targeted skills

bull Establish conducive regulation

Enforce intellectual propertyprotection and other legalframework as necessary

bull Create clusters Develop dedicated

industrial clusters with supplychain-friendly infrastructure and

facilities

Executionbull Address risks of buyers Find

practical ways to hedge risks of

buyers (for example 50 percentdomestic 50 percent international)

bull Nurture start-ups Pragmatically alignvendor and local partner interests

mdash Clear timelines goals KPIs

mdash Additional subsidies in early years

mdash Additional credits for expansioninto adjacent spaces

bull Create national champions

Build from established base to

mdash Transfer codiied technologyand licenses

mdash Integrate with global OEMsupply chains

mdash Develop OEM exit strategies

(reducing equity holdings over time)bull Manage portfolio Maintain

coherent venture portfolio with

strategy and country priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 7107GCC Defense Offset Programs The Trillion-Dollar Opportunity

of technology through licensing or co-production The key is to create enablersmdasha talent pool

RampD sponsorship taking advantage of established industrial playersmdashthat allow the sector to

not only assimilate but also commercialize the technology

983090 Fostering win-win joint venture (JV) dynamics There are three main components to thisFirst the JV ownership structure must create an incentive for the venture to expand to value

chain adjacencies innovate and create value for shareholders The local partner must have

an incentive to develop and manage long-term capabilities as opposed to focusing only on

short-term dividends An ownership structure in which the OEM eventually exits can create

such an incentive Second government support in the form of financial investments talent

supply and RampD is vital Third an ongoing working relationship with international partnersmdash

through co-marketing efforts for examplemdashcan create win-win opportunities for all partners

local and international

What Worked in South Korea Turkey and Japan

South Korea Turkey and Japan

successfully developed defense-

industry sectors Their stories

reveal instructive examples of

what workedmdashand what

ultimately did not

South Korea Acquiring top-tier

military technology and initiating

local manufacturing form the

cornerstone of South Korearsquos

industrial policy With its

burgeoning economy and

growing defense budget South

Korea has transformed its 983089983097983095983088s

nascent defense sector to one

that designs develops and

manufactures a full range of

leading-edge weapons systems

South Korearsquos defense industryprovides more than 983095983088 percent

of its own domestic needs and is

a leading exporter The country

employed its civilian industrial

base US and Japanese tech-

nological assistance and a

motivated workforce to form

the basis of its offset program

The strategy not only produced

government-backed strategic

joint ventures but also trainedhundreds of Korean engineers

secured the right management

control policies and facilitated

joint global marketing efforts

with defense partners

Turkey Following an arms

embargo in the 983089983097983095983088s Turkey

set out to build a self-sufficient

indigenous defense industry

thereby reducing dependence on

foreign arms procurement and

in time becoming an exporter

To this end the country imple-

mented rigorous policies to

support RampD in aerospace and

ICT niches consolidated

decision making and brought

together strong players Today

Turkey is a global player

partnering with industry giants

to develop systems such as

the T-983089983090983097 helicopter (with

AgustaWestland) the F-983091983093

fighter (with Lockheed Martin)

the A983092983088983088M transport aircraft(with Airbus) and Type 983090983089983092

submarines (with HDW) Turkey

has since integrated government

authorities with leading domestic

firms RampD houses educational

institutions subcontractors and

financing entities

Japan Since the early 983089983097983094983088s

Japan has used technology

cross-selling to bring domesticcivilian companiesmdashled by large

conglomerates such as

Mitsubishi Kawasaki and

NEC Corpmdashinto the defense

sector contributing to the

development of the countryrsquos

aerospace electronics telecom

and automotive industries

From 983089983097983093983088 to the early 983089983097983096983088s

Japan grew its defense industry

with the help of 983076983089983088 billion in

advanced technology from the

United States By the 983089983097983095983088s the

country was manufacturing its

own military ground vehicles

artillery and naval vessels with

most under US defense

contractor licenses Japan has

since made notable strides in

aircraft developing the F-983090

fighter jet the P-983089 maritime

patrol and the C-983090 transport

A ban on arms exports to all but

the United States and NATOcountries has prevented Japan

from establishing a strong

presence in the international

defense market Add to this the

countryrsquos declining domestic

military expenditures over the

past 983090983088 years and it does not

bode well for the Japanese

industry In the summer of 983090983088983089983091

however the Japanese Defense

Ministry announced a review ofits decades-old ban auguring

opportunities for national

contractors

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 8108GCC Defense Offset Programs The Trillion-Dollar Opportunity

983091 Facilitating operational readiness Ultimately concerns about a new company supplying

strategic systems or services must be resolved Assuring that international OEM expertise is

present in the recipient country and then transferring it to the JV is one way to do it Another

is to mandate a JV of an OEM with trusted national champions who have a track record of

delivering It is important to remember this The offset venture must be a true partner of the

armed forces Its leaders understand the client countryrsquos capability requirements long-term

plans to support them and realign to changing priorities when necessary

The most important factor in securingtechnology transfer is the creation of

enablers that allow the sector to not onlyassimilate but also commercialize thetechnology

Applying Lessons Learned

GCC countries can take immediate actions to accelerate their evolution from the seed stageto the export-leadership stage and capitalize on the trillion-dollar opportunity of defense

offset programs The trick is to go beyond the essential strategy to enable the ecosystem and

to execute sustainable deals that engage parties constructively Following are four practical

actions

bull Connect strategies and choose your battles Now is the perfect time for GCC governments

to create national defense industrial strategies that align with civilian national strategies and

programs Applying scenario-based planning to develop these strategies will help countries

succeed in virtually any event in uncertain times It is vital to focus on building specific value

chain areas tailoring the offset policy to national circumstances and to align military with

civilian interests

bull Orchestrate the ecosystem enablers Establish and manage a complete ecosystem of public

and private sector institutions Take an active role in bringing together partners that offer what

is needed to build a true defense industry ecosystem technology acquisition targeted RampD

abundant talent pools favorable regulations that enforce intellectual property protection and

minimize investor risk and a supply chain-friendly infrastructure

bull Execute smartly The execution is where many well-conceived programs falter Smart

execution requires juggling and aligning the interests of all stakeholders deal by deal

It minimizes the risks for military buyers but ensures that economic-development goalsare met It nurtures startups with clear time lines goals and key performance indicators

but takes advantage of national champions and builds new ones It extracts value from

the presence of international OEMs but ensures that local JV partners are pulling their

weight Finally smart execution requires managing the portfolio to maintain coherence

with national priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 9109GCC Defense Offset Programs The Trillion-Dollar Opportunity

bull Integrate integrate integrate An imperative to capture the value of defense offsets is

integrating defense industrial strategy with other national development strategies and

programsmdashaccomplished by creating a strong agency charged with orchestrating defense

industry strategy monitoring offset-program performance recommending policy changes

and taking part in high-level government decision making

Seizing the MomentGCC countries have a once-in-a-lifetime opportunity to capitalize on their significant invest-

ments in defense over the next decade The window of opportunity may remain open for

decades to come but not seizing the moment today is an opportunity lost

At the national level seizing the moment requires aligning conflicting interests of defense

industry stakeholders It requires accelerating the industry evolution from seed stage to exportleadership It requires government commitment from the highest levels and integrating defense

industry strategy enablers and execution under one roof And it requires the commercially

pragmatic development of direct offset ventures today that can become the national industrial

champions of tomorrow

Regionally seizing the moment means increased collaboration in building capability at a GCC

level and carving out niches in defense industry supply chains And while sharing the task of

building supply chains for different platforms the GCC could collectively create a defense

industry network that secures each countryrsquos specific strategic requirements

There is huge potential to accelerate growth in the GCC defense industries and in turn spur

overall national industrialization It is a trillion-dollar opportunity to create true winners in the

global export race

Authors

Anshu Vats partner

Middle East

anshuvatsatkearneycom

Matthieu de Clercq principal

Middle East

matthieudeclercqatkearneycom

Mauricio Zuazua principal

Middle East

mauriciozuazuaatkearneycom

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 1010

AT Kearney is a global team of forward-thinking partners that delivers immediate

impact and growing advantage for its clients We are passionate problem solvers

who excel in collaborating across borders to co-create and realize elegantly simple

practical and sustainable results Since 983089983097983090983094 we have been trusted advisors on the

most mission-critical issues to the worldrsquos leading organizations across all major

industries and service sectors AT Kearney has 983093983096 o1047296ices located in major businesscenters across 983092983088 countries

Americas

Asia Paci983142ic

Europe

Middle East

and Africa

Atlanta

Bogotaacute

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

Satildeo Paulo

Toronto

Washington DC

Bangkok

Beijing

Hong KongJakarta

Kuala Lumpur

Melbourne

Mumbai

New DelhiSeoul

Shanghai

Singapore

Sydney

Tokyo

Abu Dhabi

Dubai

Johannesburg

Manama

Riyadh

AT Kearney Korea LLC is a separate and

independent legal entity operating under

the AT Kearney name in Korea

copy 983090983088983089983091 AT Kearney Inc All rights reserved

The signature of our namesake and founder Andrew Thomas Kearney on the cover of this

document represents our pledge to live the values he instilled in our 983142irm and uphold his

commitment to ensuring ldquoessential rightnessrdquo in all that we do

For more information permission to reprint or translate this work and all other correspondence

please email insightatkearneycom

Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Duumlsseldorf

FrankfurtHelsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

MoscowMunich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

WarsawZurich

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 410

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 510

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 6106GCC Defense Offset Programs The Trillion-Dollar Opportunity

Offset programs vary widely hellip What

successful offset programs have incommon however is their ability toaddress three nagging issues

Offset programs can play a vital part in accelerating this evolution but there is no one-size-fits-

all set of measures that will guarantee success From Japan banning technology re-exports to

Turkey actively integrating into original equipment manufacturer (OEM) supply chains offset

programs vary widely in the strategies they follow the policies they enforce and the technology

niches they develop (see sidebar What Worked in South Korea Turkey and Japan on page 983095)

What successful offset programs do have in common however is that they effectively address

three nagging issuesmdashthe ones the GCC countries face today in the strategies chosen the

enablers developed and the ways in which deals are executed (see figure 983092)

983089 Securing technology transfer Technology transfer ensures that value created goes beyond

just financial transfers Countries achieve it by creating incentives for OEMs to transfer niches

Notes CISTAR is command control communications computers intelligence surveillance target acquisition and reconnaissance

KPIs are key performance indicators

Source AT Kearney analysis

Figure

Success factors for defense offset programs

Integrationbull Ensure interoperability Empower a strong high-level agency to orchestrate ecosystem integrate offsets with national

defense industrial strategy and other national efforts actively manage performance and recommend updates to policy

Strategybull Connect strategies Create a national

defense industrial strategy coherent

with and leveraging civilian nationalstrategies and programs

bull Deine winning scenarios Preparefor an uncertain future (for exampleself-suiciency on a platformC4ISTAR systems export leadership)

bull Choose battles Determine valuechain starting points and expandto defense and civilian adjacenciesunder a clear timeline aligned

with national defense-capabilitybuilding plans

bull Adapt to terrain Tailor approachto national priorities strengths and

weaknesses (for example focus on

areas requiring self-suiciencyproximity or localization)

Enablersbull Orchestrate the ecosystem

Establish and manage a complete

ecosystem of public and privatesector institutions

bull Technology innovation RampD

Secure technology ldquoseedrdquo andco-fund RampD in target sectors toexpand it

bull Build talent pool Implement jointHR development programs to furthertechnical and commercial talentpool for targeted skills

bull Establish conducive regulation

Enforce intellectual propertyprotection and other legalframework as necessary

bull Create clusters Develop dedicated

industrial clusters with supplychain-friendly infrastructure and

facilities

Executionbull Address risks of buyers Find

practical ways to hedge risks of

buyers (for example 50 percentdomestic 50 percent international)

bull Nurture start-ups Pragmatically alignvendor and local partner interests

mdash Clear timelines goals KPIs

mdash Additional subsidies in early years

mdash Additional credits for expansioninto adjacent spaces

bull Create national champions

Build from established base to

mdash Transfer codiied technologyand licenses

mdash Integrate with global OEMsupply chains

mdash Develop OEM exit strategies

(reducing equity holdings over time)bull Manage portfolio Maintain

coherent venture portfolio with

strategy and country priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 7107GCC Defense Offset Programs The Trillion-Dollar Opportunity

of technology through licensing or co-production The key is to create enablersmdasha talent pool

RampD sponsorship taking advantage of established industrial playersmdashthat allow the sector to

not only assimilate but also commercialize the technology

983090 Fostering win-win joint venture (JV) dynamics There are three main components to thisFirst the JV ownership structure must create an incentive for the venture to expand to value

chain adjacencies innovate and create value for shareholders The local partner must have

an incentive to develop and manage long-term capabilities as opposed to focusing only on

short-term dividends An ownership structure in which the OEM eventually exits can create

such an incentive Second government support in the form of financial investments talent

supply and RampD is vital Third an ongoing working relationship with international partnersmdash

through co-marketing efforts for examplemdashcan create win-win opportunities for all partners

local and international

What Worked in South Korea Turkey and Japan

South Korea Turkey and Japan

successfully developed defense-

industry sectors Their stories

reveal instructive examples of

what workedmdashand what

ultimately did not

South Korea Acquiring top-tier

military technology and initiating

local manufacturing form the

cornerstone of South Korearsquos

industrial policy With its

burgeoning economy and

growing defense budget South

Korea has transformed its 983089983097983095983088s

nascent defense sector to one

that designs develops and

manufactures a full range of

leading-edge weapons systems

South Korearsquos defense industryprovides more than 983095983088 percent

of its own domestic needs and is

a leading exporter The country

employed its civilian industrial

base US and Japanese tech-

nological assistance and a

motivated workforce to form

the basis of its offset program

The strategy not only produced

government-backed strategic

joint ventures but also trainedhundreds of Korean engineers

secured the right management

control policies and facilitated

joint global marketing efforts

with defense partners

Turkey Following an arms

embargo in the 983089983097983095983088s Turkey

set out to build a self-sufficient

indigenous defense industry

thereby reducing dependence on

foreign arms procurement and

in time becoming an exporter

To this end the country imple-

mented rigorous policies to

support RampD in aerospace and

ICT niches consolidated

decision making and brought

together strong players Today

Turkey is a global player

partnering with industry giants

to develop systems such as

the T-983089983090983097 helicopter (with

AgustaWestland) the F-983091983093

fighter (with Lockheed Martin)

the A983092983088983088M transport aircraft(with Airbus) and Type 983090983089983092

submarines (with HDW) Turkey

has since integrated government

authorities with leading domestic

firms RampD houses educational

institutions subcontractors and

financing entities

Japan Since the early 983089983097983094983088s

Japan has used technology

cross-selling to bring domesticcivilian companiesmdashled by large

conglomerates such as

Mitsubishi Kawasaki and

NEC Corpmdashinto the defense

sector contributing to the

development of the countryrsquos

aerospace electronics telecom

and automotive industries

From 983089983097983093983088 to the early 983089983097983096983088s

Japan grew its defense industry

with the help of 983076983089983088 billion in

advanced technology from the

United States By the 983089983097983095983088s the

country was manufacturing its

own military ground vehicles

artillery and naval vessels with

most under US defense

contractor licenses Japan has

since made notable strides in

aircraft developing the F-983090

fighter jet the P-983089 maritime

patrol and the C-983090 transport

A ban on arms exports to all but

the United States and NATOcountries has prevented Japan

from establishing a strong

presence in the international

defense market Add to this the

countryrsquos declining domestic

military expenditures over the

past 983090983088 years and it does not

bode well for the Japanese

industry In the summer of 983090983088983089983091

however the Japanese Defense

Ministry announced a review ofits decades-old ban auguring

opportunities for national

contractors

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 8108GCC Defense Offset Programs The Trillion-Dollar Opportunity

983091 Facilitating operational readiness Ultimately concerns about a new company supplying

strategic systems or services must be resolved Assuring that international OEM expertise is

present in the recipient country and then transferring it to the JV is one way to do it Another

is to mandate a JV of an OEM with trusted national champions who have a track record of

delivering It is important to remember this The offset venture must be a true partner of the

armed forces Its leaders understand the client countryrsquos capability requirements long-term

plans to support them and realign to changing priorities when necessary

The most important factor in securingtechnology transfer is the creation of

enablers that allow the sector to not onlyassimilate but also commercialize thetechnology

Applying Lessons Learned

GCC countries can take immediate actions to accelerate their evolution from the seed stageto the export-leadership stage and capitalize on the trillion-dollar opportunity of defense

offset programs The trick is to go beyond the essential strategy to enable the ecosystem and

to execute sustainable deals that engage parties constructively Following are four practical

actions

bull Connect strategies and choose your battles Now is the perfect time for GCC governments

to create national defense industrial strategies that align with civilian national strategies and

programs Applying scenario-based planning to develop these strategies will help countries

succeed in virtually any event in uncertain times It is vital to focus on building specific value

chain areas tailoring the offset policy to national circumstances and to align military with

civilian interests

bull Orchestrate the ecosystem enablers Establish and manage a complete ecosystem of public

and private sector institutions Take an active role in bringing together partners that offer what

is needed to build a true defense industry ecosystem technology acquisition targeted RampD

abundant talent pools favorable regulations that enforce intellectual property protection and

minimize investor risk and a supply chain-friendly infrastructure

bull Execute smartly The execution is where many well-conceived programs falter Smart

execution requires juggling and aligning the interests of all stakeholders deal by deal

It minimizes the risks for military buyers but ensures that economic-development goalsare met It nurtures startups with clear time lines goals and key performance indicators

but takes advantage of national champions and builds new ones It extracts value from

the presence of international OEMs but ensures that local JV partners are pulling their

weight Finally smart execution requires managing the portfolio to maintain coherence

with national priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 9109GCC Defense Offset Programs The Trillion-Dollar Opportunity

bull Integrate integrate integrate An imperative to capture the value of defense offsets is

integrating defense industrial strategy with other national development strategies and

programsmdashaccomplished by creating a strong agency charged with orchestrating defense

industry strategy monitoring offset-program performance recommending policy changes

and taking part in high-level government decision making

Seizing the MomentGCC countries have a once-in-a-lifetime opportunity to capitalize on their significant invest-

ments in defense over the next decade The window of opportunity may remain open for

decades to come but not seizing the moment today is an opportunity lost

At the national level seizing the moment requires aligning conflicting interests of defense

industry stakeholders It requires accelerating the industry evolution from seed stage to exportleadership It requires government commitment from the highest levels and integrating defense

industry strategy enablers and execution under one roof And it requires the commercially

pragmatic development of direct offset ventures today that can become the national industrial

champions of tomorrow

Regionally seizing the moment means increased collaboration in building capability at a GCC

level and carving out niches in defense industry supply chains And while sharing the task of

building supply chains for different platforms the GCC could collectively create a defense

industry network that secures each countryrsquos specific strategic requirements

There is huge potential to accelerate growth in the GCC defense industries and in turn spur

overall national industrialization It is a trillion-dollar opportunity to create true winners in the

global export race

Authors

Anshu Vats partner

Middle East

anshuvatsatkearneycom

Matthieu de Clercq principal

Middle East

matthieudeclercqatkearneycom

Mauricio Zuazua principal

Middle East

mauriciozuazuaatkearneycom

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 1010

AT Kearney is a global team of forward-thinking partners that delivers immediate

impact and growing advantage for its clients We are passionate problem solvers

who excel in collaborating across borders to co-create and realize elegantly simple

practical and sustainable results Since 983089983097983090983094 we have been trusted advisors on the

most mission-critical issues to the worldrsquos leading organizations across all major

industries and service sectors AT Kearney has 983093983096 o1047296ices located in major businesscenters across 983092983088 countries

Americas

Asia Paci983142ic

Europe

Middle East

and Africa

Atlanta

Bogotaacute

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

Satildeo Paulo

Toronto

Washington DC

Bangkok

Beijing

Hong KongJakarta

Kuala Lumpur

Melbourne

Mumbai

New DelhiSeoul

Shanghai

Singapore

Sydney

Tokyo

Abu Dhabi

Dubai

Johannesburg

Manama

Riyadh

AT Kearney Korea LLC is a separate and

independent legal entity operating under

the AT Kearney name in Korea

copy 983090983088983089983091 AT Kearney Inc All rights reserved

The signature of our namesake and founder Andrew Thomas Kearney on the cover of this

document represents our pledge to live the values he instilled in our 983142irm and uphold his

commitment to ensuring ldquoessential rightnessrdquo in all that we do

For more information permission to reprint or translate this work and all other correspondence

please email insightatkearneycom

Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Duumlsseldorf

FrankfurtHelsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

MoscowMunich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

WarsawZurich

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 510

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 6106GCC Defense Offset Programs The Trillion-Dollar Opportunity

Offset programs vary widely hellip What

successful offset programs have incommon however is their ability toaddress three nagging issues

Offset programs can play a vital part in accelerating this evolution but there is no one-size-fits-

all set of measures that will guarantee success From Japan banning technology re-exports to

Turkey actively integrating into original equipment manufacturer (OEM) supply chains offset

programs vary widely in the strategies they follow the policies they enforce and the technology

niches they develop (see sidebar What Worked in South Korea Turkey and Japan on page 983095)

What successful offset programs do have in common however is that they effectively address

three nagging issuesmdashthe ones the GCC countries face today in the strategies chosen the

enablers developed and the ways in which deals are executed (see figure 983092)

983089 Securing technology transfer Technology transfer ensures that value created goes beyond

just financial transfers Countries achieve it by creating incentives for OEMs to transfer niches

Notes CISTAR is command control communications computers intelligence surveillance target acquisition and reconnaissance

KPIs are key performance indicators

Source AT Kearney analysis

Figure

Success factors for defense offset programs

Integrationbull Ensure interoperability Empower a strong high-level agency to orchestrate ecosystem integrate offsets with national

defense industrial strategy and other national efforts actively manage performance and recommend updates to policy

Strategybull Connect strategies Create a national

defense industrial strategy coherent

with and leveraging civilian nationalstrategies and programs

bull Deine winning scenarios Preparefor an uncertain future (for exampleself-suiciency on a platformC4ISTAR systems export leadership)

bull Choose battles Determine valuechain starting points and expandto defense and civilian adjacenciesunder a clear timeline aligned

with national defense-capabilitybuilding plans

bull Adapt to terrain Tailor approachto national priorities strengths and

weaknesses (for example focus on

areas requiring self-suiciencyproximity or localization)

Enablersbull Orchestrate the ecosystem

Establish and manage a complete

ecosystem of public and privatesector institutions

bull Technology innovation RampD

Secure technology ldquoseedrdquo andco-fund RampD in target sectors toexpand it

bull Build talent pool Implement jointHR development programs to furthertechnical and commercial talentpool for targeted skills

bull Establish conducive regulation

Enforce intellectual propertyprotection and other legalframework as necessary

bull Create clusters Develop dedicated

industrial clusters with supplychain-friendly infrastructure and

facilities

Executionbull Address risks of buyers Find

practical ways to hedge risks of

buyers (for example 50 percentdomestic 50 percent international)

bull Nurture start-ups Pragmatically alignvendor and local partner interests

mdash Clear timelines goals KPIs

mdash Additional subsidies in early years

mdash Additional credits for expansioninto adjacent spaces

bull Create national champions

Build from established base to

mdash Transfer codiied technologyand licenses

mdash Integrate with global OEMsupply chains

mdash Develop OEM exit strategies

(reducing equity holdings over time)bull Manage portfolio Maintain

coherent venture portfolio with

strategy and country priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 7107GCC Defense Offset Programs The Trillion-Dollar Opportunity

of technology through licensing or co-production The key is to create enablersmdasha talent pool

RampD sponsorship taking advantage of established industrial playersmdashthat allow the sector to

not only assimilate but also commercialize the technology

983090 Fostering win-win joint venture (JV) dynamics There are three main components to thisFirst the JV ownership structure must create an incentive for the venture to expand to value

chain adjacencies innovate and create value for shareholders The local partner must have

an incentive to develop and manage long-term capabilities as opposed to focusing only on

short-term dividends An ownership structure in which the OEM eventually exits can create

such an incentive Second government support in the form of financial investments talent

supply and RampD is vital Third an ongoing working relationship with international partnersmdash

through co-marketing efforts for examplemdashcan create win-win opportunities for all partners

local and international

What Worked in South Korea Turkey and Japan

South Korea Turkey and Japan

successfully developed defense-

industry sectors Their stories

reveal instructive examples of

what workedmdashand what

ultimately did not

South Korea Acquiring top-tier

military technology and initiating

local manufacturing form the

cornerstone of South Korearsquos

industrial policy With its

burgeoning economy and

growing defense budget South

Korea has transformed its 983089983097983095983088s

nascent defense sector to one

that designs develops and

manufactures a full range of

leading-edge weapons systems

South Korearsquos defense industryprovides more than 983095983088 percent

of its own domestic needs and is

a leading exporter The country

employed its civilian industrial

base US and Japanese tech-

nological assistance and a

motivated workforce to form

the basis of its offset program

The strategy not only produced

government-backed strategic

joint ventures but also trainedhundreds of Korean engineers

secured the right management

control policies and facilitated

joint global marketing efforts

with defense partners

Turkey Following an arms

embargo in the 983089983097983095983088s Turkey

set out to build a self-sufficient

indigenous defense industry

thereby reducing dependence on

foreign arms procurement and

in time becoming an exporter

To this end the country imple-

mented rigorous policies to

support RampD in aerospace and

ICT niches consolidated

decision making and brought

together strong players Today

Turkey is a global player

partnering with industry giants

to develop systems such as

the T-983089983090983097 helicopter (with

AgustaWestland) the F-983091983093

fighter (with Lockheed Martin)

the A983092983088983088M transport aircraft(with Airbus) and Type 983090983089983092

submarines (with HDW) Turkey

has since integrated government

authorities with leading domestic

firms RampD houses educational

institutions subcontractors and

financing entities

Japan Since the early 983089983097983094983088s

Japan has used technology

cross-selling to bring domesticcivilian companiesmdashled by large

conglomerates such as

Mitsubishi Kawasaki and

NEC Corpmdashinto the defense

sector contributing to the

development of the countryrsquos

aerospace electronics telecom

and automotive industries

From 983089983097983093983088 to the early 983089983097983096983088s

Japan grew its defense industry

with the help of 983076983089983088 billion in

advanced technology from the

United States By the 983089983097983095983088s the

country was manufacturing its

own military ground vehicles

artillery and naval vessels with

most under US defense

contractor licenses Japan has

since made notable strides in

aircraft developing the F-983090

fighter jet the P-983089 maritime

patrol and the C-983090 transport

A ban on arms exports to all but

the United States and NATOcountries has prevented Japan

from establishing a strong

presence in the international

defense market Add to this the

countryrsquos declining domestic

military expenditures over the

past 983090983088 years and it does not

bode well for the Japanese

industry In the summer of 983090983088983089983091

however the Japanese Defense

Ministry announced a review ofits decades-old ban auguring

opportunities for national

contractors

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 8108GCC Defense Offset Programs The Trillion-Dollar Opportunity

983091 Facilitating operational readiness Ultimately concerns about a new company supplying

strategic systems or services must be resolved Assuring that international OEM expertise is

present in the recipient country and then transferring it to the JV is one way to do it Another

is to mandate a JV of an OEM with trusted national champions who have a track record of

delivering It is important to remember this The offset venture must be a true partner of the

armed forces Its leaders understand the client countryrsquos capability requirements long-term

plans to support them and realign to changing priorities when necessary

The most important factor in securingtechnology transfer is the creation of

enablers that allow the sector to not onlyassimilate but also commercialize thetechnology

Applying Lessons Learned

GCC countries can take immediate actions to accelerate their evolution from the seed stageto the export-leadership stage and capitalize on the trillion-dollar opportunity of defense

offset programs The trick is to go beyond the essential strategy to enable the ecosystem and

to execute sustainable deals that engage parties constructively Following are four practical

actions

bull Connect strategies and choose your battles Now is the perfect time for GCC governments

to create national defense industrial strategies that align with civilian national strategies and

programs Applying scenario-based planning to develop these strategies will help countries

succeed in virtually any event in uncertain times It is vital to focus on building specific value

chain areas tailoring the offset policy to national circumstances and to align military with

civilian interests

bull Orchestrate the ecosystem enablers Establish and manage a complete ecosystem of public

and private sector institutions Take an active role in bringing together partners that offer what

is needed to build a true defense industry ecosystem technology acquisition targeted RampD

abundant talent pools favorable regulations that enforce intellectual property protection and

minimize investor risk and a supply chain-friendly infrastructure

bull Execute smartly The execution is where many well-conceived programs falter Smart

execution requires juggling and aligning the interests of all stakeholders deal by deal

It minimizes the risks for military buyers but ensures that economic-development goalsare met It nurtures startups with clear time lines goals and key performance indicators

but takes advantage of national champions and builds new ones It extracts value from

the presence of international OEMs but ensures that local JV partners are pulling their

weight Finally smart execution requires managing the portfolio to maintain coherence

with national priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 9109GCC Defense Offset Programs The Trillion-Dollar Opportunity

bull Integrate integrate integrate An imperative to capture the value of defense offsets is

integrating defense industrial strategy with other national development strategies and

programsmdashaccomplished by creating a strong agency charged with orchestrating defense

industry strategy monitoring offset-program performance recommending policy changes

and taking part in high-level government decision making

Seizing the MomentGCC countries have a once-in-a-lifetime opportunity to capitalize on their significant invest-

ments in defense over the next decade The window of opportunity may remain open for

decades to come but not seizing the moment today is an opportunity lost

At the national level seizing the moment requires aligning conflicting interests of defense

industry stakeholders It requires accelerating the industry evolution from seed stage to exportleadership It requires government commitment from the highest levels and integrating defense

industry strategy enablers and execution under one roof And it requires the commercially

pragmatic development of direct offset ventures today that can become the national industrial

champions of tomorrow

Regionally seizing the moment means increased collaboration in building capability at a GCC

level and carving out niches in defense industry supply chains And while sharing the task of

building supply chains for different platforms the GCC could collectively create a defense

industry network that secures each countryrsquos specific strategic requirements

There is huge potential to accelerate growth in the GCC defense industries and in turn spur

overall national industrialization It is a trillion-dollar opportunity to create true winners in the

global export race

Authors

Anshu Vats partner

Middle East

anshuvatsatkearneycom

Matthieu de Clercq principal

Middle East

matthieudeclercqatkearneycom

Mauricio Zuazua principal

Middle East

mauriciozuazuaatkearneycom

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 1010

AT Kearney is a global team of forward-thinking partners that delivers immediate

impact and growing advantage for its clients We are passionate problem solvers

who excel in collaborating across borders to co-create and realize elegantly simple

practical and sustainable results Since 983089983097983090983094 we have been trusted advisors on the

most mission-critical issues to the worldrsquos leading organizations across all major

industries and service sectors AT Kearney has 983093983096 o1047296ices located in major businesscenters across 983092983088 countries

Americas

Asia Paci983142ic

Europe

Middle East

and Africa

Atlanta

Bogotaacute

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

Satildeo Paulo

Toronto

Washington DC

Bangkok

Beijing

Hong KongJakarta

Kuala Lumpur

Melbourne

Mumbai

New DelhiSeoul

Shanghai

Singapore

Sydney

Tokyo

Abu Dhabi

Dubai

Johannesburg

Manama

Riyadh

AT Kearney Korea LLC is a separate and

independent legal entity operating under

the AT Kearney name in Korea

copy 983090983088983089983091 AT Kearney Inc All rights reserved

The signature of our namesake and founder Andrew Thomas Kearney on the cover of this

document represents our pledge to live the values he instilled in our 983142irm and uphold his

commitment to ensuring ldquoessential rightnessrdquo in all that we do

For more information permission to reprint or translate this work and all other correspondence

please email insightatkearneycom

Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Duumlsseldorf

FrankfurtHelsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

MoscowMunich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

WarsawZurich

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 6106GCC Defense Offset Programs The Trillion-Dollar Opportunity

Offset programs vary widely hellip What

successful offset programs have incommon however is their ability toaddress three nagging issues

Offset programs can play a vital part in accelerating this evolution but there is no one-size-fits-

all set of measures that will guarantee success From Japan banning technology re-exports to

Turkey actively integrating into original equipment manufacturer (OEM) supply chains offset

programs vary widely in the strategies they follow the policies they enforce and the technology

niches they develop (see sidebar What Worked in South Korea Turkey and Japan on page 983095)

What successful offset programs do have in common however is that they effectively address

three nagging issuesmdashthe ones the GCC countries face today in the strategies chosen the

enablers developed and the ways in which deals are executed (see figure 983092)

983089 Securing technology transfer Technology transfer ensures that value created goes beyond

just financial transfers Countries achieve it by creating incentives for OEMs to transfer niches

Notes CISTAR is command control communications computers intelligence surveillance target acquisition and reconnaissance

KPIs are key performance indicators

Source AT Kearney analysis

Figure

Success factors for defense offset programs

Integrationbull Ensure interoperability Empower a strong high-level agency to orchestrate ecosystem integrate offsets with national

defense industrial strategy and other national efforts actively manage performance and recommend updates to policy

Strategybull Connect strategies Create a national

defense industrial strategy coherent

with and leveraging civilian nationalstrategies and programs

bull Deine winning scenarios Preparefor an uncertain future (for exampleself-suiciency on a platformC4ISTAR systems export leadership)

bull Choose battles Determine valuechain starting points and expandto defense and civilian adjacenciesunder a clear timeline aligned

with national defense-capabilitybuilding plans

bull Adapt to terrain Tailor approachto national priorities strengths and

weaknesses (for example focus on

areas requiring self-suiciencyproximity or localization)

Enablersbull Orchestrate the ecosystem

Establish and manage a complete

ecosystem of public and privatesector institutions

bull Technology innovation RampD

Secure technology ldquoseedrdquo andco-fund RampD in target sectors toexpand it

bull Build talent pool Implement jointHR development programs to furthertechnical and commercial talentpool for targeted skills

bull Establish conducive regulation

Enforce intellectual propertyprotection and other legalframework as necessary

bull Create clusters Develop dedicated

industrial clusters with supplychain-friendly infrastructure and

facilities

Executionbull Address risks of buyers Find

practical ways to hedge risks of

buyers (for example 50 percentdomestic 50 percent international)

bull Nurture start-ups Pragmatically alignvendor and local partner interests

mdash Clear timelines goals KPIs

mdash Additional subsidies in early years

mdash Additional credits for expansioninto adjacent spaces

bull Create national champions

Build from established base to

mdash Transfer codiied technologyand licenses

mdash Integrate with global OEMsupply chains

mdash Develop OEM exit strategies

(reducing equity holdings over time)bull Manage portfolio Maintain

coherent venture portfolio with

strategy and country priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 7107GCC Defense Offset Programs The Trillion-Dollar Opportunity

of technology through licensing or co-production The key is to create enablersmdasha talent pool

RampD sponsorship taking advantage of established industrial playersmdashthat allow the sector to

not only assimilate but also commercialize the technology

983090 Fostering win-win joint venture (JV) dynamics There are three main components to thisFirst the JV ownership structure must create an incentive for the venture to expand to value

chain adjacencies innovate and create value for shareholders The local partner must have

an incentive to develop and manage long-term capabilities as opposed to focusing only on

short-term dividends An ownership structure in which the OEM eventually exits can create

such an incentive Second government support in the form of financial investments talent

supply and RampD is vital Third an ongoing working relationship with international partnersmdash

through co-marketing efforts for examplemdashcan create win-win opportunities for all partners

local and international

What Worked in South Korea Turkey and Japan

South Korea Turkey and Japan

successfully developed defense-

industry sectors Their stories

reveal instructive examples of

what workedmdashand what

ultimately did not

South Korea Acquiring top-tier

military technology and initiating

local manufacturing form the

cornerstone of South Korearsquos

industrial policy With its

burgeoning economy and

growing defense budget South

Korea has transformed its 983089983097983095983088s

nascent defense sector to one

that designs develops and

manufactures a full range of

leading-edge weapons systems

South Korearsquos defense industryprovides more than 983095983088 percent

of its own domestic needs and is

a leading exporter The country

employed its civilian industrial

base US and Japanese tech-

nological assistance and a

motivated workforce to form

the basis of its offset program

The strategy not only produced

government-backed strategic

joint ventures but also trainedhundreds of Korean engineers

secured the right management

control policies and facilitated

joint global marketing efforts

with defense partners

Turkey Following an arms

embargo in the 983089983097983095983088s Turkey

set out to build a self-sufficient

indigenous defense industry

thereby reducing dependence on

foreign arms procurement and

in time becoming an exporter

To this end the country imple-

mented rigorous policies to

support RampD in aerospace and

ICT niches consolidated

decision making and brought

together strong players Today

Turkey is a global player

partnering with industry giants

to develop systems such as

the T-983089983090983097 helicopter (with

AgustaWestland) the F-983091983093

fighter (with Lockheed Martin)

the A983092983088983088M transport aircraft(with Airbus) and Type 983090983089983092

submarines (with HDW) Turkey

has since integrated government

authorities with leading domestic

firms RampD houses educational

institutions subcontractors and

financing entities

Japan Since the early 983089983097983094983088s

Japan has used technology

cross-selling to bring domesticcivilian companiesmdashled by large

conglomerates such as

Mitsubishi Kawasaki and

NEC Corpmdashinto the defense

sector contributing to the

development of the countryrsquos

aerospace electronics telecom

and automotive industries

From 983089983097983093983088 to the early 983089983097983096983088s

Japan grew its defense industry

with the help of 983076983089983088 billion in

advanced technology from the

United States By the 983089983097983095983088s the

country was manufacturing its

own military ground vehicles

artillery and naval vessels with

most under US defense

contractor licenses Japan has

since made notable strides in

aircraft developing the F-983090

fighter jet the P-983089 maritime

patrol and the C-983090 transport

A ban on arms exports to all but

the United States and NATOcountries has prevented Japan

from establishing a strong

presence in the international

defense market Add to this the

countryrsquos declining domestic

military expenditures over the

past 983090983088 years and it does not

bode well for the Japanese

industry In the summer of 983090983088983089983091

however the Japanese Defense

Ministry announced a review ofits decades-old ban auguring

opportunities for national

contractors

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 8108GCC Defense Offset Programs The Trillion-Dollar Opportunity

983091 Facilitating operational readiness Ultimately concerns about a new company supplying

strategic systems or services must be resolved Assuring that international OEM expertise is

present in the recipient country and then transferring it to the JV is one way to do it Another

is to mandate a JV of an OEM with trusted national champions who have a track record of

delivering It is important to remember this The offset venture must be a true partner of the

armed forces Its leaders understand the client countryrsquos capability requirements long-term

plans to support them and realign to changing priorities when necessary

The most important factor in securingtechnology transfer is the creation of

enablers that allow the sector to not onlyassimilate but also commercialize thetechnology

Applying Lessons Learned

GCC countries can take immediate actions to accelerate their evolution from the seed stageto the export-leadership stage and capitalize on the trillion-dollar opportunity of defense

offset programs The trick is to go beyond the essential strategy to enable the ecosystem and

to execute sustainable deals that engage parties constructively Following are four practical

actions

bull Connect strategies and choose your battles Now is the perfect time for GCC governments

to create national defense industrial strategies that align with civilian national strategies and

programs Applying scenario-based planning to develop these strategies will help countries

succeed in virtually any event in uncertain times It is vital to focus on building specific value

chain areas tailoring the offset policy to national circumstances and to align military with

civilian interests

bull Orchestrate the ecosystem enablers Establish and manage a complete ecosystem of public

and private sector institutions Take an active role in bringing together partners that offer what

is needed to build a true defense industry ecosystem technology acquisition targeted RampD

abundant talent pools favorable regulations that enforce intellectual property protection and

minimize investor risk and a supply chain-friendly infrastructure

bull Execute smartly The execution is where many well-conceived programs falter Smart

execution requires juggling and aligning the interests of all stakeholders deal by deal

It minimizes the risks for military buyers but ensures that economic-development goalsare met It nurtures startups with clear time lines goals and key performance indicators

but takes advantage of national champions and builds new ones It extracts value from

the presence of international OEMs but ensures that local JV partners are pulling their

weight Finally smart execution requires managing the portfolio to maintain coherence

with national priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 9109GCC Defense Offset Programs The Trillion-Dollar Opportunity

bull Integrate integrate integrate An imperative to capture the value of defense offsets is

integrating defense industrial strategy with other national development strategies and

programsmdashaccomplished by creating a strong agency charged with orchestrating defense

industry strategy monitoring offset-program performance recommending policy changes

and taking part in high-level government decision making

Seizing the MomentGCC countries have a once-in-a-lifetime opportunity to capitalize on their significant invest-

ments in defense over the next decade The window of opportunity may remain open for

decades to come but not seizing the moment today is an opportunity lost

At the national level seizing the moment requires aligning conflicting interests of defense

industry stakeholders It requires accelerating the industry evolution from seed stage to exportleadership It requires government commitment from the highest levels and integrating defense

industry strategy enablers and execution under one roof And it requires the commercially

pragmatic development of direct offset ventures today that can become the national industrial

champions of tomorrow

Regionally seizing the moment means increased collaboration in building capability at a GCC

level and carving out niches in defense industry supply chains And while sharing the task of

building supply chains for different platforms the GCC could collectively create a defense

industry network that secures each countryrsquos specific strategic requirements

There is huge potential to accelerate growth in the GCC defense industries and in turn spur

overall national industrialization It is a trillion-dollar opportunity to create true winners in the

global export race

Authors

Anshu Vats partner

Middle East

anshuvatsatkearneycom

Matthieu de Clercq principal

Middle East

matthieudeclercqatkearneycom

Mauricio Zuazua principal

Middle East

mauriciozuazuaatkearneycom

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 1010

AT Kearney is a global team of forward-thinking partners that delivers immediate

impact and growing advantage for its clients We are passionate problem solvers

who excel in collaborating across borders to co-create and realize elegantly simple

practical and sustainable results Since 983089983097983090983094 we have been trusted advisors on the

most mission-critical issues to the worldrsquos leading organizations across all major

industries and service sectors AT Kearney has 983093983096 o1047296ices located in major businesscenters across 983092983088 countries

Americas

Asia Paci983142ic

Europe

Middle East

and Africa

Atlanta

Bogotaacute

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

Satildeo Paulo

Toronto

Washington DC

Bangkok

Beijing

Hong KongJakarta

Kuala Lumpur

Melbourne

Mumbai

New DelhiSeoul

Shanghai

Singapore

Sydney

Tokyo

Abu Dhabi

Dubai

Johannesburg

Manama

Riyadh

AT Kearney Korea LLC is a separate and

independent legal entity operating under

the AT Kearney name in Korea

copy 983090983088983089983091 AT Kearney Inc All rights reserved

The signature of our namesake and founder Andrew Thomas Kearney on the cover of this

document represents our pledge to live the values he instilled in our 983142irm and uphold his

commitment to ensuring ldquoessential rightnessrdquo in all that we do

For more information permission to reprint or translate this work and all other correspondence

please email insightatkearneycom

Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Duumlsseldorf

FrankfurtHelsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

MoscowMunich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

WarsawZurich

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 7107GCC Defense Offset Programs The Trillion-Dollar Opportunity

of technology through licensing or co-production The key is to create enablersmdasha talent pool

RampD sponsorship taking advantage of established industrial playersmdashthat allow the sector to

not only assimilate but also commercialize the technology

983090 Fostering win-win joint venture (JV) dynamics There are three main components to thisFirst the JV ownership structure must create an incentive for the venture to expand to value

chain adjacencies innovate and create value for shareholders The local partner must have

an incentive to develop and manage long-term capabilities as opposed to focusing only on

short-term dividends An ownership structure in which the OEM eventually exits can create

such an incentive Second government support in the form of financial investments talent

supply and RampD is vital Third an ongoing working relationship with international partnersmdash

through co-marketing efforts for examplemdashcan create win-win opportunities for all partners

local and international

What Worked in South Korea Turkey and Japan

South Korea Turkey and Japan

successfully developed defense-

industry sectors Their stories

reveal instructive examples of

what workedmdashand what

ultimately did not

South Korea Acquiring top-tier

military technology and initiating

local manufacturing form the

cornerstone of South Korearsquos

industrial policy With its

burgeoning economy and

growing defense budget South

Korea has transformed its 983089983097983095983088s

nascent defense sector to one

that designs develops and

manufactures a full range of

leading-edge weapons systems

South Korearsquos defense industryprovides more than 983095983088 percent

of its own domestic needs and is

a leading exporter The country

employed its civilian industrial

base US and Japanese tech-

nological assistance and a

motivated workforce to form

the basis of its offset program

The strategy not only produced

government-backed strategic

joint ventures but also trainedhundreds of Korean engineers

secured the right management

control policies and facilitated

joint global marketing efforts

with defense partners

Turkey Following an arms

embargo in the 983089983097983095983088s Turkey

set out to build a self-sufficient

indigenous defense industry

thereby reducing dependence on

foreign arms procurement and

in time becoming an exporter

To this end the country imple-

mented rigorous policies to

support RampD in aerospace and

ICT niches consolidated

decision making and brought

together strong players Today

Turkey is a global player

partnering with industry giants

to develop systems such as

the T-983089983090983097 helicopter (with

AgustaWestland) the F-983091983093

fighter (with Lockheed Martin)

the A983092983088983088M transport aircraft(with Airbus) and Type 983090983089983092

submarines (with HDW) Turkey

has since integrated government

authorities with leading domestic

firms RampD houses educational

institutions subcontractors and

financing entities

Japan Since the early 983089983097983094983088s

Japan has used technology

cross-selling to bring domesticcivilian companiesmdashled by large

conglomerates such as

Mitsubishi Kawasaki and

NEC Corpmdashinto the defense

sector contributing to the

development of the countryrsquos

aerospace electronics telecom

and automotive industries

From 983089983097983093983088 to the early 983089983097983096983088s

Japan grew its defense industry

with the help of 983076983089983088 billion in

advanced technology from the

United States By the 983089983097983095983088s the

country was manufacturing its

own military ground vehicles

artillery and naval vessels with

most under US defense

contractor licenses Japan has

since made notable strides in

aircraft developing the F-983090

fighter jet the P-983089 maritime

patrol and the C-983090 transport

A ban on arms exports to all but

the United States and NATOcountries has prevented Japan

from establishing a strong

presence in the international

defense market Add to this the

countryrsquos declining domestic

military expenditures over the

past 983090983088 years and it does not

bode well for the Japanese

industry In the summer of 983090983088983089983091

however the Japanese Defense

Ministry announced a review ofits decades-old ban auguring

opportunities for national

contractors

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 8108GCC Defense Offset Programs The Trillion-Dollar Opportunity

983091 Facilitating operational readiness Ultimately concerns about a new company supplying

strategic systems or services must be resolved Assuring that international OEM expertise is

present in the recipient country and then transferring it to the JV is one way to do it Another

is to mandate a JV of an OEM with trusted national champions who have a track record of

delivering It is important to remember this The offset venture must be a true partner of the

armed forces Its leaders understand the client countryrsquos capability requirements long-term

plans to support them and realign to changing priorities when necessary

The most important factor in securingtechnology transfer is the creation of

enablers that allow the sector to not onlyassimilate but also commercialize thetechnology

Applying Lessons Learned

GCC countries can take immediate actions to accelerate their evolution from the seed stageto the export-leadership stage and capitalize on the trillion-dollar opportunity of defense

offset programs The trick is to go beyond the essential strategy to enable the ecosystem and

to execute sustainable deals that engage parties constructively Following are four practical

actions

bull Connect strategies and choose your battles Now is the perfect time for GCC governments

to create national defense industrial strategies that align with civilian national strategies and

programs Applying scenario-based planning to develop these strategies will help countries

succeed in virtually any event in uncertain times It is vital to focus on building specific value

chain areas tailoring the offset policy to national circumstances and to align military with

civilian interests

bull Orchestrate the ecosystem enablers Establish and manage a complete ecosystem of public

and private sector institutions Take an active role in bringing together partners that offer what

is needed to build a true defense industry ecosystem technology acquisition targeted RampD

abundant talent pools favorable regulations that enforce intellectual property protection and

minimize investor risk and a supply chain-friendly infrastructure

bull Execute smartly The execution is where many well-conceived programs falter Smart

execution requires juggling and aligning the interests of all stakeholders deal by deal

It minimizes the risks for military buyers but ensures that economic-development goalsare met It nurtures startups with clear time lines goals and key performance indicators

but takes advantage of national champions and builds new ones It extracts value from

the presence of international OEMs but ensures that local JV partners are pulling their

weight Finally smart execution requires managing the portfolio to maintain coherence

with national priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 9109GCC Defense Offset Programs The Trillion-Dollar Opportunity

bull Integrate integrate integrate An imperative to capture the value of defense offsets is

integrating defense industrial strategy with other national development strategies and

programsmdashaccomplished by creating a strong agency charged with orchestrating defense

industry strategy monitoring offset-program performance recommending policy changes

and taking part in high-level government decision making

Seizing the MomentGCC countries have a once-in-a-lifetime opportunity to capitalize on their significant invest-

ments in defense over the next decade The window of opportunity may remain open for

decades to come but not seizing the moment today is an opportunity lost

At the national level seizing the moment requires aligning conflicting interests of defense

industry stakeholders It requires accelerating the industry evolution from seed stage to exportleadership It requires government commitment from the highest levels and integrating defense

industry strategy enablers and execution under one roof And it requires the commercially

pragmatic development of direct offset ventures today that can become the national industrial

champions of tomorrow

Regionally seizing the moment means increased collaboration in building capability at a GCC

level and carving out niches in defense industry supply chains And while sharing the task of

building supply chains for different platforms the GCC could collectively create a defense

industry network that secures each countryrsquos specific strategic requirements

There is huge potential to accelerate growth in the GCC defense industries and in turn spur

overall national industrialization It is a trillion-dollar opportunity to create true winners in the

global export race

Authors

Anshu Vats partner

Middle East

anshuvatsatkearneycom

Matthieu de Clercq principal

Middle East

matthieudeclercqatkearneycom

Mauricio Zuazua principal

Middle East

mauriciozuazuaatkearneycom

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 1010

AT Kearney is a global team of forward-thinking partners that delivers immediate

impact and growing advantage for its clients We are passionate problem solvers

who excel in collaborating across borders to co-create and realize elegantly simple

practical and sustainable results Since 983089983097983090983094 we have been trusted advisors on the

most mission-critical issues to the worldrsquos leading organizations across all major

industries and service sectors AT Kearney has 983093983096 o1047296ices located in major businesscenters across 983092983088 countries

Americas

Asia Paci983142ic

Europe

Middle East

and Africa

Atlanta

Bogotaacute

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

Satildeo Paulo

Toronto

Washington DC

Bangkok

Beijing

Hong KongJakarta

Kuala Lumpur

Melbourne

Mumbai

New DelhiSeoul

Shanghai

Singapore

Sydney

Tokyo

Abu Dhabi

Dubai

Johannesburg

Manama

Riyadh

AT Kearney Korea LLC is a separate and

independent legal entity operating under

the AT Kearney name in Korea

copy 983090983088983089983091 AT Kearney Inc All rights reserved

The signature of our namesake and founder Andrew Thomas Kearney on the cover of this

document represents our pledge to live the values he instilled in our 983142irm and uphold his

commitment to ensuring ldquoessential rightnessrdquo in all that we do

For more information permission to reprint or translate this work and all other correspondence

please email insightatkearneycom

Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Duumlsseldorf

FrankfurtHelsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

MoscowMunich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

WarsawZurich

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 8108GCC Defense Offset Programs The Trillion-Dollar Opportunity

983091 Facilitating operational readiness Ultimately concerns about a new company supplying

strategic systems or services must be resolved Assuring that international OEM expertise is

present in the recipient country and then transferring it to the JV is one way to do it Another

is to mandate a JV of an OEM with trusted national champions who have a track record of

delivering It is important to remember this The offset venture must be a true partner of the

armed forces Its leaders understand the client countryrsquos capability requirements long-term

plans to support them and realign to changing priorities when necessary

The most important factor in securingtechnology transfer is the creation of

enablers that allow the sector to not onlyassimilate but also commercialize thetechnology

Applying Lessons Learned

GCC countries can take immediate actions to accelerate their evolution from the seed stageto the export-leadership stage and capitalize on the trillion-dollar opportunity of defense

offset programs The trick is to go beyond the essential strategy to enable the ecosystem and

to execute sustainable deals that engage parties constructively Following are four practical

actions

bull Connect strategies and choose your battles Now is the perfect time for GCC governments

to create national defense industrial strategies that align with civilian national strategies and

programs Applying scenario-based planning to develop these strategies will help countries

succeed in virtually any event in uncertain times It is vital to focus on building specific value

chain areas tailoring the offset policy to national circumstances and to align military with

civilian interests

bull Orchestrate the ecosystem enablers Establish and manage a complete ecosystem of public

and private sector institutions Take an active role in bringing together partners that offer what

is needed to build a true defense industry ecosystem technology acquisition targeted RampD

abundant talent pools favorable regulations that enforce intellectual property protection and

minimize investor risk and a supply chain-friendly infrastructure

bull Execute smartly The execution is where many well-conceived programs falter Smart

execution requires juggling and aligning the interests of all stakeholders deal by deal

It minimizes the risks for military buyers but ensures that economic-development goalsare met It nurtures startups with clear time lines goals and key performance indicators

but takes advantage of national champions and builds new ones It extracts value from

the presence of international OEMs but ensures that local JV partners are pulling their

weight Finally smart execution requires managing the portfolio to maintain coherence

with national priorities

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 9109GCC Defense Offset Programs The Trillion-Dollar Opportunity

bull Integrate integrate integrate An imperative to capture the value of defense offsets is

integrating defense industrial strategy with other national development strategies and

programsmdashaccomplished by creating a strong agency charged with orchestrating defense

industry strategy monitoring offset-program performance recommending policy changes

and taking part in high-level government decision making

Seizing the MomentGCC countries have a once-in-a-lifetime opportunity to capitalize on their significant invest-

ments in defense over the next decade The window of opportunity may remain open for

decades to come but not seizing the moment today is an opportunity lost

At the national level seizing the moment requires aligning conflicting interests of defense

industry stakeholders It requires accelerating the industry evolution from seed stage to exportleadership It requires government commitment from the highest levels and integrating defense

industry strategy enablers and execution under one roof And it requires the commercially

pragmatic development of direct offset ventures today that can become the national industrial

champions of tomorrow

Regionally seizing the moment means increased collaboration in building capability at a GCC

level and carving out niches in defense industry supply chains And while sharing the task of

building supply chains for different platforms the GCC could collectively create a defense

industry network that secures each countryrsquos specific strategic requirements

There is huge potential to accelerate growth in the GCC defense industries and in turn spur

overall national industrialization It is a trillion-dollar opportunity to create true winners in the

global export race

Authors

Anshu Vats partner

Middle East

anshuvatsatkearneycom

Matthieu de Clercq principal

Middle East

matthieudeclercqatkearneycom

Mauricio Zuazua principal

Middle East

mauriciozuazuaatkearneycom

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 1010

AT Kearney is a global team of forward-thinking partners that delivers immediate

impact and growing advantage for its clients We are passionate problem solvers

who excel in collaborating across borders to co-create and realize elegantly simple

practical and sustainable results Since 983089983097983090983094 we have been trusted advisors on the

most mission-critical issues to the worldrsquos leading organizations across all major

industries and service sectors AT Kearney has 983093983096 o1047296ices located in major businesscenters across 983092983088 countries

Americas

Asia Paci983142ic

Europe

Middle East

and Africa

Atlanta

Bogotaacute

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

Satildeo Paulo

Toronto

Washington DC

Bangkok

Beijing

Hong KongJakarta

Kuala Lumpur

Melbourne

Mumbai

New DelhiSeoul

Shanghai

Singapore

Sydney

Tokyo

Abu Dhabi

Dubai

Johannesburg

Manama

Riyadh

AT Kearney Korea LLC is a separate and

independent legal entity operating under

the AT Kearney name in Korea

copy 983090983088983089983091 AT Kearney Inc All rights reserved

The signature of our namesake and founder Andrew Thomas Kearney on the cover of this

document represents our pledge to live the values he instilled in our 983142irm and uphold his

commitment to ensuring ldquoessential rightnessrdquo in all that we do

For more information permission to reprint or translate this work and all other correspondence

please email insightatkearneycom

Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Duumlsseldorf

FrankfurtHelsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

MoscowMunich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

WarsawZurich

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 9109GCC Defense Offset Programs The Trillion-Dollar Opportunity

bull Integrate integrate integrate An imperative to capture the value of defense offsets is

integrating defense industrial strategy with other national development strategies and

programsmdashaccomplished by creating a strong agency charged with orchestrating defense

industry strategy monitoring offset-program performance recommending policy changes

and taking part in high-level government decision making

Seizing the MomentGCC countries have a once-in-a-lifetime opportunity to capitalize on their significant invest-

ments in defense over the next decade The window of opportunity may remain open for

decades to come but not seizing the moment today is an opportunity lost

At the national level seizing the moment requires aligning conflicting interests of defense

industry stakeholders It requires accelerating the industry evolution from seed stage to exportleadership It requires government commitment from the highest levels and integrating defense

industry strategy enablers and execution under one roof And it requires the commercially

pragmatic development of direct offset ventures today that can become the national industrial

champions of tomorrow

Regionally seizing the moment means increased collaboration in building capability at a GCC

level and carving out niches in defense industry supply chains And while sharing the task of

building supply chains for different platforms the GCC could collectively create a defense

industry network that secures each countryrsquos specific strategic requirements

There is huge potential to accelerate growth in the GCC defense industries and in turn spur

overall national industrialization It is a trillion-dollar opportunity to create true winners in the

global export race

Authors

Anshu Vats partner

Middle East

anshuvatsatkearneycom

Matthieu de Clercq principal

Middle East

matthieudeclercqatkearneycom

Mauricio Zuazua principal

Middle East

mauriciozuazuaatkearneycom

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 1010

AT Kearney is a global team of forward-thinking partners that delivers immediate

impact and growing advantage for its clients We are passionate problem solvers

who excel in collaborating across borders to co-create and realize elegantly simple

practical and sustainable results Since 983089983097983090983094 we have been trusted advisors on the

most mission-critical issues to the worldrsquos leading organizations across all major

industries and service sectors AT Kearney has 983093983096 o1047296ices located in major businesscenters across 983092983088 countries

Americas

Asia Paci983142ic

Europe

Middle East

and Africa

Atlanta

Bogotaacute

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

Satildeo Paulo

Toronto

Washington DC

Bangkok

Beijing

Hong KongJakarta

Kuala Lumpur

Melbourne

Mumbai

New DelhiSeoul

Shanghai

Singapore

Sydney

Tokyo

Abu Dhabi

Dubai

Johannesburg

Manama

Riyadh

AT Kearney Korea LLC is a separate and

independent legal entity operating under

the AT Kearney name in Korea

copy 983090983088983089983091 AT Kearney Inc All rights reserved

The signature of our namesake and founder Andrew Thomas Kearney on the cover of this

document represents our pledge to live the values he instilled in our 983142irm and uphold his

commitment to ensuring ldquoessential rightnessrdquo in all that we do

For more information permission to reprint or translate this work and all other correspondence

please email insightatkearneycom

Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Duumlsseldorf

FrankfurtHelsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

MoscowMunich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

WarsawZurich

8102019 GCC Defense Offset Programs - The Trillion-Dollar Opportunity v2

httpslidepdfcomreaderfullgcc-defense-offset-programs-the-trillion-dollar-opportunity-v2 1010

AT Kearney is a global team of forward-thinking partners that delivers immediate

impact and growing advantage for its clients We are passionate problem solvers

who excel in collaborating across borders to co-create and realize elegantly simple

practical and sustainable results Since 983089983097983090983094 we have been trusted advisors on the

most mission-critical issues to the worldrsquos leading organizations across all major

industries and service sectors AT Kearney has 983093983096 o1047296ices located in major businesscenters across 983092983088 countries

Americas

Asia Paci983142ic

Europe

Middle East

and Africa

Atlanta

Bogotaacute

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

San Francisco

Satildeo Paulo

Toronto

Washington DC

Bangkok

Beijing

Hong KongJakarta

Kuala Lumpur

Melbourne

Mumbai

New DelhiSeoul

Shanghai

Singapore

Sydney

Tokyo

Abu Dhabi

Dubai

Johannesburg

Manama

Riyadh

AT Kearney Korea LLC is a separate and

independent legal entity operating under

the AT Kearney name in Korea

copy 983090983088983089983091 AT Kearney Inc All rights reserved

The signature of our namesake and founder Andrew Thomas Kearney on the cover of this

document represents our pledge to live the values he instilled in our 983142irm and uphold his

commitment to ensuring ldquoessential rightnessrdquo in all that we do

For more information permission to reprint or translate this work and all other correspondence

please email insightatkearneycom

Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Duumlsseldorf

FrankfurtHelsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

MoscowMunich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

WarsawZurich