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Struggling Denel must diversify and look beyond Middle East, parliament hears

Parliament heard on Wednesday that Denel's fortunes hinge on its restructuring, which could include diversifying its client base beyond the Middle East.
Parliament heard on Wednesday that Denel's fortunes hinge on its restructuring, which could include diversifying its client base beyond the Middle East.
Image: REUTERS/Siphiwe Sibeko/File Photo

The public enterprises department has told parliament that Denel's cash is tied up in orders that it can not complete during the Covid-19 lockdown - and that the company is awaiting money for orders that have been placed.

Denel's contract execution has been an area of great challenge. If you look at the amount of money that is tied up in work-in-progress in the business, it's a real worry,” said the department's acting director-general Kgathatso Tlhakudi on Wednesday.

“We need to ensure that the management puts the focus in ensuring Denel is operational and effective going forward.”

It emerged this week that Denel will not be able to pay staff salaries for May and that June and July wages are also in jeopardy.

Denel CEO Danie du Toit was quoted as saying the company's liquidity was under severe pressure and they had to implement drastic measures to save the entity.

But senior public enterprises officials told parliament's public enterprises oversight committees on Wednesday that it was still possible to turn Denel's situation around.

“Of course it's a business that is in trouble for not paying salaries, but we have a team of board members and executives that can turn around the situation. We are counting on them to work really hard in terms of cultivating those relationships to ensure that can be done,” said Tlhakudi.

He said the leadership at the entity needs to look at how they could expedite deliveries at the business to ensure that they can invoice and get paid.

MPs also heard that a lot about-turning around Denel's fortunes hinged on its restructuring, which would include diversifying its client base and going beyond the Middle East.

“As stated in the letter from the CEO to staff , there are assets that have been identified for disposing off,” said Tlhakudi.

“We have to apply our minds here. We have to consult with the department of defence and department of science and technology to ensure that we are not getting rid of capabilities that will be required in the future. It's a bit of a process unfortunately.”

Unnecessary duplication

Weekend Bangane, the acting deputy director-general responsible for transport and defence enterprises, said the level of vertical integration was quite substantial at Denel and created unnecessary cost burdens on the business.

Bangane gave an example of Denel Pretoria Metal Pressings, which he said had significant capabilities, from melting copper to manufacturing bullets, but not all of it was used.

“The restructuring means you look at those parts of the business that you can source in the open market and you allow that business to be run differently and you become a client of that business. The restructuring looks at rationalising such structures in the organisation as one element,” he said.

Bangane said there was also an element of duplication at Denel because its businesses were in various locations for strategic reasons. Now they want to take advantage of greater synergy within the company.

Middle Eastern countries like Saudi Arabia and the United Arab Emirates have been the mainstay in terms of exports for Denel, MPs heard.

In a strategy meeting with Denel and minister Pravin Gordhan this week, Bangane said the issue of markets was discussed. “We can't have the concentration risk of being too biased towards a particular region. You need to spread yourselves across as far as possible,” he said.

He said this was an ideal position because in defence it takes years to develop a market and there are already established markets with players who have cemented their positions.

“You have to go and dislodge them - and that is not going to be an overnight achievement.”

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