Saudi Arabia’s Defense Industry And The Trap of Numbers

Let’s start with an obvious economic fact: numbers can “lie.” Not because they are wrong in themselves, but because they may measure things that are completely different from what we think.

From 2018 to 2024, Saudi Arabia announced that it had increased the percentage of Saudization in the defense industry from 4% to 25%. An impressive figure in such a short period of time, isn’t it? But if you ask yourself a simple question: Does this mean that Saudi Arabia has managed to build a real defense industry? You will find that the answer is no. It has built an improved version of the same trap it fell into nearly 40 years ago.

What does this mean?

Let me explain.

In the 1980s and 1990s, Saudi Arabia developed a strategy to localize its military industries through offset programs. Simply put, the government told foreign companies: If you want to sell us weapons, you are welcome to do so, but on condition that you invest within the kingdom, work with local companies, and transfer technology. In theory, it was a brilliant idea, especially since Saudi Arabia is a huge and important market for any defense company in the world and one of the largest arms importers globally. However, the reality of implementation revealed a major flaw.

Why is this considered disastrous?

Because foreign companies were not transferring real technology. They were only appeasing the Saudi side by transferring a small part of their operations, such as assembly, maintenance, and training, while intellectual property, design, research and development, and everything else that makes the industry real remained outside Saudi Arabia.

If we look at the Peace Shield project with Boeing, we see that it failed. The same is true of the Al-Yamamah project in collaboration with British Aerospace; neither the Americans nor the British created a real national industry in Saudi Arabia.

This raises an important question: Why did the Saudi government not learn its lesson?

The answer is simple: because the government was measuring success with the wrong metrics. It was not measuring the existence of a real industry or the extent of technology transfer, but rather the size of investments, the number of jobs created, and the percentage of “local manufacturing” without verifying the nature and type of that manufacturing.

Now we come to what may upset some people, despite its truth: unfortunately, Vision 2030 is a repeat of the same story.

In 2017, Saudi Arabia established SAMI, the Saudi Arabian Military Industries company, with the goal of localizing 50% of defense spending by 2030. It is a bold figure and a clear plan, but the most important question is: Is the mechanism different this time from previous experiences that ended in failure? Unfortunately, the answer is no.

Looking at SAMI, we see that it is already achieving good results, having entered the top 100 list of the world’s largest defense companies. In 2018, it had only 100 employees, while in 2023, it had 3,600. The company has also entered into important partnerships with Turkish companies such as FNSS, Nurol Makina, ASELSAN, and Baykar, which can be described as highly valuable.

However, when we look deeper into the management structure, organizational culture, and technology transfer mechanism within the company, we find that there has been little change from what it was before.

Upon further reflection on the nature of the company, we can understand what is meant more clearly. SAMI is 100% owned by the Public Investment Fund (PIF), and its board of directors is chaired by Prince Khalid bin Salman, Minister of Defense. In just eight years, the position of CEO has changed three times: the first was a German from Rheinmetall (Andreas Schiefer), the second was an American from Northrop Grumman (Walid Abu Khalid), and the third and current CEO is Thamer Al-Muheid, who comes from a background in general industry rather than defense.

Added to this is a deep structural problem between SAMI and GAMI (the General Authority for Military Industries). Anyone who has dealt with Saudi Arabia in this sector will understand exactly what I mean, but in short: there are two agencies performing almost the same role, and there is competition between them. Although competition may seem positive from a distance, in a sector with limited resources — both human and technical — it becomes a significant burden.

When the relevant authorities attempted to resolve this issue, another problem arose: double bureaucracy. GAMI is the regulatory body, while SAMI is the implementing body, and any private company attempting to enter this sector finds itself in a long maze: licenses from GAMI, imposed partnerships with SAMI, approvals from military authorities, and funding from the Ministry of Finance.

Each entity has a different administrative process, and any delay in these processes kills any ambition for innovation.

All of this raises serious questions about the state of administrative and regulatory stability in this sector, making it seem like a case of “trial and error.”

Let’s compare this situation with what is happening in Turkey. We can take the companies ASELSAN and Baykar as examples. Baykar was founded as a family business in 1975, as was ASELSAN in the same year. If we look at the management structure of both companies, we find it to be relatively stable, and this management stability creates confidence and enables long-term planning.

This does not mean that we are calling for no change in leadership whatsoever, but rather that what we see in SAMI is not just a change in leadership, but a change in the very mindset, in the management philosophy, and in the plans and vision. This aspect needs further elaboration, which we can discuss later.

The second difference is administrative freedom. As I mentioned in a previous article, after 2016, Turkey gradually moved away from a model in which the military ran everything to a new model overseen by technocratic civilian leaders in the management of defense industries. This change has effectively changed everything, and I have previously explained the reasons for the importance of this shift.

In Saudi Arabia, however, to this day, there is still almost complete control by the military, represented by Prince Khalid bin Salman (Minister of Defense), over decision-making and vision. We must not confuse this point with the previous one regarding leadership change and the accompanying change in vision and management philosophy, as they are two completely different things that are not mutually exclusive.

This brings us to the fundamental question: Why is an increase in localization from 4% to 25% not considered a true indicator of success?

Let me start with a simple question: Does simply raising the percentage mean that you have built a real industry? The answer is no. Because not all localization is considered industry.

Imagine, for example, that SAMI contracted with a Turkish company to manufacture a small part for a drone, stipulating that 30% of the production be local in Saudi Arabia. Is this good? I say no, it is not good.

The problem here is that what happened is not building an industry, but simply that Saudi Arabia paid money to a foreign company to operate within it. Once the contract expires, the company closes its doors, takes the technology with it, and leaves. What’s worse is that the part that is actually transferred to Saudi Arabia is usually not the core of the real technology, while the most important part is kept outside the country.

Focus with me on this point.

The percentage calculated by the government — whether through GAMI or SAMI — is the amount of military spending that goes to local companies. But what is not measured is the amount of knowledge that remains within the country, the amount of local innovation that actually takes place, or whether we now have genuine intellectual property in Saudi names.

The difference between these two measures is much greater than you might imagine.

Take the Turkish experience as an example.

When Turkey increased its defense exports from $1 billion to $7.2 billion, it was actually exporting purely Turkish products. The TB2 drone is owned by Baykar, the Atmaka missile is entirely Turkish-made, and the KAAN fighter jet is the result of a purely Turkish design.

As for Saudi Arabia, when it says that it has localized 25% of its defense spending, most of this percentage actually represents foreign assembly plants operating on Saudi soil. These are German, Turkish, or American production lines, but the decision-making, innovation, and intellectual property remain outside the country.

This brings us to the heart of the problem.

In economic terms, it can be said that the wrong incentives create the wrong behavior.

When the incentive is to increase the localization rate, not to build technology, the logical result is that everyone will seek to fill the quota by any means possible: employing more people in local companies, even if they are less competent or more expensive, or focusing on operations rather than research and development. In this case, the goal becomes a number rather than development.

And if local companies are only motivated to engage in assembly projects because they count as “local,” they will have no real incentive to invest in research or develop innovation.

Simply put: the metric set by the government is what drives behavior, and current behavior is geared toward achieving numbers rather than building industry.

But the problem runs deeper than that.

You may now say, “Okay, what’s the solution? Or are you just good at listing problems?”

In fact, the solution lies in the previous lines themselves, but in reverse.

The measurement method itself must be changed, the military and civilian sectors must be separated, SAMI must be given real decision-making powers, the relationship between it and GAMI must be restructured within clear and effective institutional frameworks, and space must be made for calculated risk-taking.

Saudi Arabia has all the ingredients that enabled Turkey to advance in this sector, but the decisive difference lies in the existence of a wise administrative environment versus a turbulent administrative environment, which determines the fate of the industry.

The opportunity still exists, but change must come from the essence, not the numbers.