Denel 2006 Strategic Plan: briefing

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
17 May 2006
DENEL 2006 STRATEGIC PLAN: BRIEFING

Chairperson: Mr Y Carrim (ANC)

Documents handed out:
PowerPoint Slide: Creating a Viable Denel: Part 1 & 2

SUMMARY
Denel briefed the Committee on its 2006 strategic plan and progress with its restructuring. Denel reported that because of the importance of the defense industry relative to private and public sector partnerships its relationship with government had been strengthened and it was receiving more support from government. Denel would report further progress to the Committee again in six months’ time.

MINUTES
Denel Presentation
Denel Chief Executive Officer, Mr Shaun Liebenberg made a detailed presentation to the Committee on the current status and future direction of Denel. In his presentation he outlined the key events that have influenced the Global Defense Industry and Denel in particular. He further outlined strategic imperatives and the recapitalisation programme. He outlined the strategic implementation process and status of Denel, giving its transformation strategy, reforms and developments at Head Office in line with the core changes and transformation. He informed the Committee on the disposal of non-core assets.

Discussion
Mr Carrim thanked and congratulated Denel for a professional and thorough report to the Committee. He offered the Committee’s assistance to Denel at any time and stated that the Committee would lobby Parliament and government to make the case for Denel. The Committee looked forward to Denel’s next report in October/November.

The Chairperson spent some time recapping the events of the last year in relation to Denel. Mr Carrim noted that last year the Committee found that there was need for government to support Denel. The Committee asked all stakeholders to cooperate and ensure that Denel became viable on a sustainable basis as a business. He further noted that the Committee last year recognized that there was no clarity on the part of Government and other stakeholders on what role Denel should play. To the extent that there was increasing convergence, this was welcomed, but if there were differences, there was to be government support to Denel. The Committee noted that that they were not defense experts but the picture conveyed of the state of defense in the world, the status of Denel and the need to fundamentally transform it convinced the Committee then of the importance and need to transform Denel.

The Chair agreed with the conclusion of last year and noted that while the recommendations and visions of last year were good, how much of them were implemented was important. Further, the Chair wondered how fundamentally different this year’s approach would and how much of this would be implemented and when. This is what the Committee was interested in. What would be the measurable objectives, targets and deadlines to achieve? What would the implications and effects of implementing different elements of the strategy be? How will the new skills and capacity necessary be found? How many jobs will be lost and how will this be dealt with? What are the financial implications of the new vision and strategy?

The Chair recognised that while the new Denel had to be given time, the company would have to report in six months on progress with the new approach and its financial status.

In respect of Denel’s difficulties in India, the Committee had felt that it could not pursue the matter further. In respect of failure to finalise the annual report in time, the Committee had agreed that the reasons were reasonable. Last year, the DA had recommended that Denel should be given very limited support from government from then on; it had to be privatised. The IFP strongly believed that government should support Denel to ensure that it succeeded as a company. The minutes of last year concluded that the Committee appreciated the commitment of the new leadership at Denel to implement the new strategy, restructure Denel and make it viable.

The Chairperson asked whether Denel had experienced better co-operation from government.

Mr Liebenberg introduced his team: Ms L King (Executive Head of Strategy), Ms P Boloyi (Executive Head of Communications and Cooperate Affairs), Mr S Basch (Press Liaison for International Affairs) and Mr Butcher Matutle (Denel: Head of Government and Industrial Relations).

Mr Liebenberg apologised for not sending his presentation to the Committee in advance. He pointed out that there had been an improvement in stakeholder communication. It was impossible to fix Denel without a common vision and purpose among stakeholders such as the Departments of Public Enterprises, Defense, Foreign Affairs, Trade and Industry, and the Treasury. He stated that there had been progress in this regard.

The Chair asked whether government and Parliament had played full roles up to this point. He noted that overseas defense companies flourished when they had political support. He also asked about new skills and capacity

Mr Liebenberg pointed out in the past Denel had partnerships and alliances that were not strategic enough. But now Denel would surround itself with such that would complement skills and necessary capacities required. The second component that tackled skills and capacity was organisational effectiveness through transformation, one of which is skills development.

The Chair asked how many jobs would be lost and how would this be handled. He also wanted to know more about disposal of non-core assets.

Mr Liebenberg said the company had a productivity level of 50,000 dollars per head as opposed to 250,000 dollars per head by global standards. The model, the systems and processes of the company needed to change to ensure that Denel was globally competitive. Job losses would amount to about 750 people. Denel thanked organised labour for their tremendous relationship, support and open dialogue. About 500 of the 750 staff have already left the company. The process had retained the best skills as far as possible.

The CEO then asked Ms P Bolayi, Executive Head of Communications and Corporate Affairs to elaborate on the social support programme.

Ms Bolayi pointed out that there was a social plan in place whose objective was to minimise the impact of job losses. It also looked at training programmes for equipping the people being retrenched so that they can do something after leaving the company. The programme also looked at how Denel could reintegrate the people who lost some jobs in some areas, so that they are used in the other divisions of Denel. Affected employees were also trained in support programmes so that they were able to do something on their own. The social plan services were like personal counseling, given that retrenchment is an emotional experience. Internal monitors were employed supported by external psychologists. Financial counseling was also provided as was job counseling. Entrepreneurship skills were provided to those who opted to go for business and start up capital was provided for this. So far 265 ex-employees had started their own businesses.

Mr Liebenberg added that the social support programme was a process and not an event. It was likely that another 150 to 250 people could be affected. The CEO pointed out there was a study being conducted on the ammunition plant at the Phillipi site and indications were that the plant might be closed. The plant had about 350 people and most of these would be relocated to other plants like the Somerset West plant.

The Chair asked if environmental reasons played a role in the decision about the Phillipi plant. He also asked if the company made follow-up checks on retrenched workers. He further asked about South Africa’s productivity in relation to other countries.

Mr Liebenberg pointed out that global standards stipulated that a company earned 250,000 US Dollars per head and yet in South Africa was at 50,000 US Dollars. Thus, we had low productivity per head, about 20% below the global standard. This was due to the model of production in South Africa which was vertically integrated, getting raw resources and producing them into finished products, meaning that Denel employed more people.

A Member asked if orders increased whether the productivity issue would be solved.

Mr Liebenberg answered that while sales would fix some problems, the defence industry worked on a five-year sale cycle. The processes in South Africa were outdated, with old equipment of the 1940s competing against the latest equipment. Countries like China and Korea could produce three times as much with a third of the cost base.

The Chair asked Denel to be clear about the implementation plan; how they were going to implement all the good things stated in the objectives especially as they related to meeting specific deadlines?

Mr Liebenberg pointed out that the implementation plan had specific objectives, actions and deadlines which were specified in the presentations.

There was a question on captured markets in the last presentation to Parliament. Was there any report on this aspect?

Mr Liebenberg said there was a lot of detail in the presentation. Denel was a complex business, in a very complex industry with a very challenging commercial aspect to it. It has a number of components and diverse stakeholders such as government. The defense world was a very politically charged environment.

The meeting adjourned.