STEWART PENNEY / TEL AVIV, REHOVOT, HAIFA & PALMACHIM AIR BASE
Israel created its defence industry to survive as a nation: today, exporting unique technologies is crucial
Israel's geopolitical position and almost continuous conflict since the nation's creation in 1948 mean the country has developed a strong defence industry producing the gamut of aerospace systems.
Despite its small size, a population only slightly over 6 million and a land area smaller than that of many US states, Israel has been able to develop unique capabilities such as the Arrow, the world's only operational anti-tactical ballistic missile (ATBM) system.
To encourage innovation, the government has maintained competition within the defence market, and despite some rationalisation in recent years, Israeli defence ministry competitions are often contested by three or more indigenous companies.
The best known is Israel Aircraft Industries (IAI), celebrating its 50th anniversary this year. The company is government owned, as are weapons manufacturers Israel Military Industries and Rafael.
Until comparatively recently Rafael was a defence ministry agency. There are also private enterprises such as Elbit Systems, which matches IAI in terms of capability and which has been in the vanguard of rationalisation, acquiring Elop in 2000. More recently, in June this year, IAI's Elta Systems subsidiary acquired a 30% share of of Koor Industries' Elisra group, which also includes BVR, Tadiran Systems and Tadiran Spectralink.
Fierce competition at home and the government's unwillingness to buy every product its manufacturers produce means exports are crucial to Israeli industry. IAI's Tamam division has reported 2002 sales of $73 million, 61% of them exports. Over 70% of Elbit Systems' $764.5 million sales in 2001 were accounted for by overseas business, while more than 80% of the aerial ammunition directorate of Israel Military Industries' sales were for export last year. Brazil, India, Romania, Singapore and Turkey have procured significant volumes of defence equipment from Israeli companies, which are reluctant to speak about their customers, home or abroad.
Israel has learned from the recent Iraq war, according to sources in industry and government. They believe the conflict highlighted the role of space sensors, unmanned air vehicles, smart weapons and net-centric systems. One industry official says: "These were the big four lessons, so we [Israeli industry] are in the right place… but once these lessons are understood, we will face more competitors, and stronger competition in our traditional markets… so we need to keep our leads in these areas".
These businesses are intent on maintaining their successes, so research and development is considered a key investment. Arie Tal, Elbit company secretary, says revenues have doubled since 1996. Last year net income was $45.1 million and R&D spending in 2002 reached $63 million, he adds. Apart from a large jump in revenues following the acquisition of Elop, most growth has been organic, he says.
Elbit's growth strategy is to expand existing business into new products and with new products and alliances. Tal says key areas for expansion are services - the group recently began supplying elementary training flying hours to the Israeli air force - security, intelligence, surveillance and reconnaissance (ISR) and space.
IAI officially spends 3% of turnover on R&D, but the figure is probably closer to 5%, says a senior official. Significant R&D spending is good for the long term, the source adds. IAI achieved sales of $2 billion last year, divided 60:40 defence to commercial. Among the company's principal businesses is Elta, which specialises in ISR products, including the Phalcon airborne early warning system, communications and electronic intelligence systems. It is also viewed by IAI as Israel's radar technology house, providing the gamut of capability from ground-ground systems to satellite carried synthetic aperture radar (SAR).
IAI's space and missiles products include the Arrow ATBM and smart weapons as well as satellites. The company says it is developing the next generation of imagery and communications satellites, and despite having launched only three craft and a requirement to link with an overseas customer, the company predicts it will be a significant player, particularly in SAR-equipped satellites. Israel's size and position mean launches are towards the west over the Mediterranean, against the Earth's rotation. This reduces the load that can be placed in orbit. Communications satellites have to be launched elsewhere, but small surveillance craft are a possibility and the limitation "is a trigger to shrink payloads".
Another business is the Malat UAV house, "one of IAI's main business lines", with the sales expected to continue growing rapidly. UAVs are a central pillar of the Israeli defence industry.
IAI president and chief executive Moshe Keret says all the company's growth is internal. One drawback of the company's government-owned status is that IAI tends to restrict its holdings in other companies to a minority "as you don't want them to become government holdings", and their assets are not on IAI's balance sheet. This may change as IAI is on the list of possible privatisations drawn up by Israel's finance minister Binyamin Netanyahu.
IAI is aiming for double-digit growth for the next 10 years. The target is set against growth in 1995-2000 of around 10% a year, says Keret, but times have been harder, with only "very minimal growth" achieved in 2001-3. Keret says IAI's "in-depth work, analysis and a strategic outlook of all markets" has allowed growth strategies for the next 10 years to be "identified". These embrace unmanned systems, including unmanned combat air vehicles, and ISR, says Keret. Despite its government ownership, Keret says IAI does not receive any subsidies - "not one penny".
Major rationalisation has been a feature of the aerospace world for the past decade, but Israeli industry is distinguished almost by a lack of consolidation. One Israeli industrialist says: "I think it's started, but it's slow." Elbit's Tal says: "Consolidation should happen, and we keep saying that."
Some company ownerships have changed. Keret says: "I think it is imperative to see more consolidation, mergers and joint ventures, whatever provides a better standing in the market. If you take all the companies in Israel, they would still be smaller than a division of Boeing, Lockheed Martin or BAE Systems."
Joint ventures have been the preferred route to co-operation, says Keret. IAI has teamed with arch rival Elbit for some export competitions, often as a result of government pressure, wary that without co-operation two Israeli companies may cut one another's financial throat. Keret says "There is a continuous effort to rationalise on this and compete only where necessary, the market is tough enough."
Keret says the defence ministry wants competition, but also consolidation. "There is a dichotomy: competition is good not only in the final phase, when it is about cost and money. It also has an impact in the first phase when competition is about ideas, development and technology." Even if Israeli industry consolidates there will be struggles with overseas companies, predicts Keret, who adds: "I have no problem with competing, I have done so all my lifeÉ sometimes you win, sometimes you lose."
The level of internal competition is underlined by requirements for electronic security fences - network-centric collections of sensors controlled by a single command post - along the Israeli/Palestinian border. Elbit, IAI and Rafael have proposals. How many other countries can boost three home teams bidding for a government contract?
Rafael corporate vice-president business development and marketing Eitan Yudilevich agrees that "competition is good as it generates ideas, so some suggest if the Israeli industry consolidates, we would lose that advantage".
Yudilevich says Rafael's shift in January last year from government agency to government-owned company has meant little change as it has been managed as a business since the early 1990s. Like other Israeli industrialists, Yudilevich believes his company is in a strong position to benefit from the lessons to be learned from the Iraq war. Precision munitions, a key element of the conflict, are "not new - the question is how much can we grow this. I believe we're in the right position, with the right systems, but growth is not an overnight thing."
One previous lesson heavily underlined in Iraq is the importance in reducing time between detecting a target and knocking it out, says Yudilevich. "We have a concept to do it in 10min; we have several systems that fit with this," he says. The Reccelite reconnaissance pod can download pictures to a ground station equipped with Golden Bay, an automatic image analysis and exploitation system, for onwards transmission to precision-guided munitions.
"The difference in the future is this is in an integrated business area, so we're talking sensor to shooter as a system," says Yudilevich, adding that it will not necessarily consist of only Rafael equipment. "We're teaming to approach the customer in the right way."
Command, control, communications and computers (C4) ISR is another important area for Rafael, says Yudilevich, although in international markets "we will probably offer elements rather than complete systems".
A communications element would be Ravenet, which allows construction of a network of aircraft and weapons connected through broadband, digital datalinks. Rafael is "very strong in communications, a national centre of excellence. We started with weapons datalinks," says Yudilevich.
Although Israel's last combat use of a short-range air-to-air missile was in 1982, Yudilevich says such weapons remain a growth area for Rafael. It recently unveiled the imaging-infrared seeker-equipped Python 5. He says recent conflicts have been asymmetric, with air superiority guaranteed from almost day one, but in future wars both sides may have strong air forces and air-to-air missiles will be required. He acknowledges, however, that for now the air-to-air market is slower than air-to-ground, "which is growing incredibly fast".
On consolidation, Yudilevich says Israeli industry typically exports 60-70% of output, "but not Rafael", so teaming with an international company may be preferable, particularly as it already has a number of joint ventures with Israeli companies. He adds: "We're more than open to international partnerships, including taking equity in international companies."
Source: Flight International