The Saudi Arabian defense market was valued at USD 13.58 billion in 2020, and it is anticipated to register a CAGR of 4.34%, to reach a market value of USD 17.39 billion by 2026.
The country is one of the top military spenders globally and the primary importer of arms from the United States. The high defense spending of the country, due to its robust economy and high GDP, made the market lucrative for several local and foreign players. Several joint venture agreements have been signed since the establishment of the Saudi Arabian Military Industries (SAMI).
Political tensions in the Middle East over the past decade have resulted in the country investing more in the defense sector. Saudi Arabian government has plans to modernize its military by 2030 and is procuring new fighter jets, surface combatants, and armored vehicles. In recent years, it has also increased its focus on C4ISR and cybersecurity solutions.
However, in the past three years, the government reduced its defense spending to focus more on the education sector. Also, recent ban on Saudi Arabia by some of the European countries will have an impact on the procurement of defense equipment which will hamper the market growth during the forecast period.
Key Market Trends
Saudi Arabia Strengthening its Defense Capabilities Amid Tensions in the Middle East
Over the past few decades, the Middle East has become a global hotspot for conflicts, with civil wars raging in Syria, Iraq, Yemen, and Libya. Moreover, the internationalization of civil wars has led to coalitions between countries, which has further disturbed the geopolitical climate in the region. In addition, the Iran–Saudi Arabia proxy conflict, sometimes also referred to as the Middle Eastern Cold War, an ongoing struggle for influence in the Middle East and surrounding regions between Iran and Saudi Arabia, has led the countries to provide varying degrees of support to opposing sides in nearby conflicts. With several nations indulging in armed conflicts in the region, there is a growing push among the countries to obtain military assets, comparable in roles and capabilities to the adversaries. Moreover, the indulgence of global superpowers with advanced military capabilities, like the United States and Russia into the scenario, has further boosted these requirements. Additionally, there are several brewing maritime conflicts in the region. For instance, territorial disputes exist between the countries in and around the Persian Gulf. These include Iran, Iraq, Kuwait, Saudi Arabia, Bahrain, Qatar, the United Arab Emirates (UAE), and Oman. There is an ongoing state of heightened military tensions between the Islamic Republic of Iran and its allies, and the United States and its allies, in the Persian Gulf region. Such conflicts are forcing the countries involved to enhance their warfighting capabilities. For Saudi Arabia, apart from Iran and its nuclear ambitions, the largest threat is the border clash with northern Yemen’s Houthi rebels, as they battle with Yemeni government forces. The Yemeni group has repeatedly targeted Aramco’s refineries in the coastal cities of Jeddah and Jubail in the past few years. In November 2020, the rebels hit an Aramco plant in Jeddah with a Quds-2 missile, tearing a hole in an oil tank, triggering an explosion and fire. Likewise, in September 2019, drones were used to attack the state-owned Saudi Aramco oil processing facilities at Abqaiq (Biqayq in Arabic) and Khurais in eastern Saudi Arabia. According to the Saudi Arabian officials, more than 10 drones and cruise missiles were used for the attack, and it originated from the north and east. Both facilities were shut down for repairs, cutting Saudi Arabia's oil production by about half (representing about 5% of global oil production) and causing some destabilization of global financial markets. Such incidents have highlighted the small gaps in the air defense capability of Saudi Arabia. Saudi air defenses have negated several of these attacks by intercepting many of the incoming projectiles. The Saudi Air Force has been using the Patriot PAC-3 as its main ballistic missiles defense system. It is also equipped with a variety of short and medium-range surface-to-air missiles such as the Improved Hawk, Shahine, and Mistral. The Royal Saudi Air Force is the only one in the Middle East that operates the Boeing E-3A Sentry, commonly known as AWACS, which, along with 2 SAAB-2000 Erieye planes, helps provide a strong early warning capability that is crucial for an effective air defense. However, the Yemeni conflict proved to be a costly war of attrition to the Saudis, who are forced to allocate much needed funds to consolidate their air defense capabilities, in addition to the military operations in Yemen. As of January 2020, the Saudi Arabian Military Industries was working on a new national counter-drone system to address asymmetric threats to the country and protect critical infrastructure and domestic military bases. The new system is anticipated to be capable of countering drones of all sizes, including radars, command-and-control stations, and advanced networking capability. Thus, a significant portion of the defense budget is being diverted for enhancing the air defense capability of the Kingdom, which is driving the growth of the Saudi Arabian defense market.
Sea-based Vehicles in the Vehicle Segment is Expected to Register the Highest Growth during the Forecast Period
The regional security environment increasingly emphasizes the importance of naval power. Navies have a front-line role in securing sea lines of communication to ensure freedom of navigation at sea, protecting exclusive economic zones and offshore assets. The navy also plays a crucial role in providing warning and engagement capabilities against air and missile attacks. Saudi Arabia is looking at capabilities to project naval prowess much further than it ever has. Intensifying international competition in the Red Sea on its western flank, Yemen’s implosion and the Horn of Africa’s instability are significant trends that are redefining Riyadh’s maritime threat landscape beyond the Arabian Gulf. The government of Saudi Arabia has initiated the Saudi Naval Expansion Program II, a naval modernization program spanning a period of more than 10 years. The government plans to spend approximately USD 20 billion on new ships (which may replace the outdated East Naval Fleet) and about USD 6 billion on the frigate program built by Lockheed Martin. SNEP II focuses attention on the Royal Saudi Navy’s Eastern Fleet, which last underwent a major modernization program in the 1980s and 1990s. It is driven in large part by a need to counter Iranian naval power, which focuses on an ability to blockade critical maritime choke points, such as the Strait of Hormuz. Under this initiative, the country ordered Multi Mission Surface Combatant Ships (MMSC). In December 2019, Lockheed Martin was awarded a USD 1.96 billion foreign military sales contract to design and construct four MMSC for the country. The delivery of the naval vessels is anticipated to begin by 2023. Similarly, the Saudi Arabian government signed an agreement worth USD 2.1 billion (EUR 1.8 billion) with Navantia in July 2018, to build five Avante 2200 corvettes for the Royal Saudi Naval Forces (RSNF). The delivery of the naval vessels is expected to be completed by 2024. In July 2020, the first of the Avante corvettes was launched by Navantia, and in November 2020, the company launched the second vessel of the five corvettes that were ordered. The Saudi Interior Ministry has been receiving deliveries for a contract estimated at nearly USD 2 billion with German shipyard Lurssen that was concluded in 2014 for nearly 150 patrol boats. They included two 60m large patrolling boats, 20 40m patrolling craft, 80 15m fast patrol boats, and 20 landing craft. Such developments render a positive outlook for the segment during the forecast period.
The market in the country is dominated by foreign players, mainly those from the United States. Notable companies among them include Lockheed Martin Corporation, the Boeing Company, and Raytheon Technology Company, among others. However, the government is trying to develop its indigenous defense manufacturing capabilities. The Government of Saudi Arabia is focusing on implementing policies to ensure that its publicly held defense manufacturers account for more than 50% of its defense revenue share, by 2030. For instance, in April 2018, Saudi Arabian Military Industries (SAMI) signed an agreement with Navantia, a Spanish shipbuilding company, to create a joint venture in Saudi Arabia, mainly to localize 60% of naval industries. According to the Navantia, this venture will be a supplier and integrator of the combat systems for the future naval program contracts in Saudi Arabia. Later, in September 2019, SAMI Navantia Naval Industries signed a USD 987.34 million contract with Navantia to collaborate on Combat System Integration (CSI) on the Avante 2200 corvettes for the Royal Saudi Naval Forces. Such initiatives may reduce the market share of foreign companies in the country during the forecast period.
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