Israel's top six defence companies received orders worth almost $5 billion in 2003, but duplication of effort and resources continues to restrict the true potential of a remarkable group of state- and privately-owned entities. Speaking to Flight International in late October, senior industry officials were upbeat about the future, but said long talked-of rationalisation must be translated into action if the country's full industrial capabilities are to be achieved.
With the national defence budget shrinking, the state can no longer bankroll companies as it once did to the tune of several billion dollars. This has driven some of the leading companies to depart from earlier business areas to specialise in specific skills, and most are seeking to gain footholds in the US and European markets to increase their already-thriving export businesses. Israel has one of the world's most diverse defence industries, providing products right across the aerospace and other military sectors. Securing international business is vital for growth, with the top six companies in 2003 averaging exports worth 68% of their total sales - a trend that will only increase, say industry officials.
Too little done
Israeli companies know they are trailing their international counterparts in speed of reform, and say too little has been done to keep pace. Joseph Ackerman, president of Israel's largest independent defence company, Elbit Systems, is a particularly strong critic. "In Israel, 70% of industry is government owned," he says. "In the USA it's 0%, and in Europe it's 15%. Israel must follow the trend in the world. Everybody talks about change, but very little has been done." Ackerman says the current structure of Israeli industry is not "efficient or effective", and consolidation will enable the country to retain its industrial power.
The Israeli state holds a 100% stake in three of the nation's leading defence concerns - Israel Aircraft Industries (IAI), Israel Military Industries and the Rafael Armament Development Authority. IAI, in turn, holds a 100% interest in radar house Elta Systems, and in 2004 flew in the face of privatisation by swooping for a 30% stake in the previously fully private Elisra group of companies.
Efforts to push through the privatisation of state-owned companies is being championed from within industry itself and by finance minister Binyamin Netanyahu, who has pledged to sell off all state-owned industries. The potential success of such moves has been highlighted by the state's first major privatisation effort, which in mid-2003 saw it relinquish an initial 15% stake in flag-carrying national airline El Al. This transition will be completed later this month, when El Al will be declared a fully private company.
IAI is the biggest defence company in Israel, and combined with its wholly owned Elta subsidiary accounts for about half the industry's annual sales. Key activities within the IAI group include aircraft upgrades, maintenance services and training systems, with main divisions including the Lahav aircraft arm, Malat UAV house and the Bedek maintenance, repair and overhaul company. Corporate vice-president Menahem Shmul describes Bedek as a "very significant growth engine". IAI recorded sales worth over $1.8 billion in 2003, with exports accounting for almost 75% of this sum, but listed a profit of just $15 million. Shmul says growth businesses for the company include space, civilian transport and cargo conversion work, plus increased activity in the business jet sector.
Sales projections for 2004 are beyond $2 billion, with the company expecting to end the year with an order backlog worth about $4.8 billion. Talk in 2003 of the state floating a 30% stake in IAI has so far failed to come to anything.
Elta describes its product range as "nothing that kills, everything that senses", and acts as IAI's dedicated radar and homeland defence house. The Ashdod-based subsidiary ended 2003 with an order backlog worth $1.3 billion, but by the end of the first quarter of 2004 this had rocketed to $2.5 billion with the completion of a deal to supply India with airborne early warning systems. Sales should rise to $540 million this year, with export business increasing to more than 90%, says company president Israel Livnat. By 2007, Elta aims for annual sales exceeding $900 million.
"We have gone through a dramatic strategic change in the last three to five years," says Livnat, with the companynow offering its customers tailored solutions. "We're not imposing on our customers to buy just what we have on the shelf." Other business interests includefire-control systems, plus self-protection, electronic warfare and satellite communications equipment, with 15-20% of itsbusiness coming from supplying systemsfor unmanned air vehicles.
With a small profit and a large payroll, Elta acknowledges rationalisation is needed in the industry, but notes that unions retain a powerful influence in Israel. The company says it has already played some part in rationalising Israeli industry, with IAI's acquisition of a 30% stake in the rival Elisra Group viewed as an attempt to avoid duplication with Elta.
Israel's primary private defence entity, Elbit Systems, is approaching an annual turnover of $1 billion after enjoying years of continued and strong growth. Its turnover more than doubled in the five years from 1999 and its current order book stands at about $1.9 billion. It has several wholly-owned Israel-based subsidiaries, including electro-optic system specialists Elop and Ortek, structural producer Cyclone, which also provides flight training services to the Israeli air force, and UAV manufacturer Silver Arrow, which also owns power plant producer UAV Engines in the UK. Elbit also has joint ownership of three companies with state-owned Rafael.
Elbit is currently involved in nine business areas. "We aim to lead in Israel and to be in the top three or four companies in the world in each sector," says Ackerman. "If we can't meet these targets, we get out of the business." Internal research and development spending is relatively high - set at about 8% of turnover. With subsidiaries in place in Brazil and the USA, the company is eyeing continued growth outside Israel. Major success has already been enjoyed in the US marketplace through its Fort Worth-based EFW subsidiary and via the Vision Systems International joint venture with Rockwell Collins subsidiary Kaiser Electronics. The latter pact has already resulted in sales of more than 1,000 Joint Helmet-Mounted Cueing Systems for 10 countries, including selection to equip Lockheed Martin's F-35 Joint Strike Fighter. This move to secure major business in the USA has seen Elbit move "from a local, to a binational, to a global company", says Ackerman.
The company now exports over 70% of its turnover - a major departure from its structure in the early 1990s, when it sold exclusively to the Israel Defence Force, but its activities remain slewed towards military programmes by a ratio of about nine to one. Elbit's current turnover is split 37% in the USA - where it has 1,100 employees - 25% in Israel, 23% in Latin America and 13% in Europe. It aims to grow the European market share to around 20%, with this increase to be balanced by slight falls in the other areas, says Ackerman.
Rafael was a department of the Israeli defence ministry until January 2002, at which point it came under state control to reflect its ownership structure.
With an order book worth $1.6 billion, the company produces ordnance, propulsion systems, rocket motors, weapons and electronic warfare systems, and is increasingly moving into the homeland defence market. Products include the Reccelite reconnaissance pod in service with the Spanish air force and selected by the Netherlands. Rafael is now looking at the potential to integrate the system with UAVs, says Alex Gan, head of the company's operational requirements team. The company produces the lightweight Skylite UAV, so any use of the Reccelite system would rely on using another supplier's air vehicle. Exports account for less than 40% of the company's sales, with the vast majority of its business still conducted for the Israeli air force. Other products include communications equipment and datalinks for use by systems including guided weapons and UAVs.
Along with IMI, Rafael is considered a likely candidate for privatisation because of the strength and diversity of its product range. The transformation of both companies will see them sold in full or as partial acquisitions, although IMI officials hope their company will be the first to undergo this process (see box P38).
Elisra Electronics Systems describes itself as the Israeli air force's electronic warfare house and also conducts extensive work in the area of command, control, communications, computers and intelligence (C4I). It owns C4I business Tadiran Electronic Systems and datalink house Tadiran Spectralink, and last month majority shareholder Koor Industries completed the acquisition of a 32.5% stake in Tadiran Communications for about $140 million. Tadiran Communications recorded sales worth $272 million in 2003, with exports representing over 83% of this total.
As with much of the reorganisation of the Israeli defence industry to date, this deal has muddied the waters of the country's infrastructure, with Elisra - itself 30% owned by IAI - now holding those shares in Elbit Systems previously held by Tadiran Communications.
In common with most of Israel's leading defence firms, Elisra is increasingly moving into the homeland defence sector, and some of its technologies are now used to protect settlers in the West Bank. The company is also moving to expand its overseas influence to increase exports from their current total of almost 65%, and hopes to establish a foothold in the UK through its pursuit of self-protection equipment deals linked to AgustaWestland's EH101 Merlin and Super Lynx helicopters. Elisra had won a contract to equip the UK Royal Air Force's eight Boeing Chinook HC3 heavy-lift helicopters with countermeasures equipment, but the deal was scrapped after problems were encountered during the type's introduction to service. Expansion into the US market is also a key goal for Elisra, but it has so far failed in three attempts to acquire US companies because of price.
Despite its major success in providing integrated electronic warfare equipment for the Israeli air force's new F-16I fighters, Elisra has suffered a recent contraction in its business activities, with the company's turnover having fallen from $360 million in 2002 to just over $280 million last year. This drop has partly been attributed to a decision to dispose of its BVR subsidiary. "We expect to be back to a $400 million turnover in a few years," says Elisra's senior vice-president Menahem Oren. Current sales are divided evenly between electronic warfare and C4I business, he says, with an order backlog worth $513 million at the start of 2004. Much of the company's anticipated growth will stem from its activities in the homeland defence market, he says.
Oren believes the Israeli defence industry could rationalise to just two main entities within the next five to 10 years. An enhanced future relationship between Elisra and IAI is considered likely, given the latter's 30% holding in the private company, "But who will run whom?" Oren asks. "Our owners want to buy, not sell." IAI currently has no operational control over Elisra's activities, and the companies continue to compete in several traditional sectors, although newly established projects will raise the level of partnership.
Industry watchers believe the next few years will finally see positive steps taken to resolve the problem of the Israeli state funding nationalised defence industry concerns, which have consistently failed to deliver it a substantial profit. Rationalisation could see Israeli defence companies acquire holding interests in their current rivals - for example, Elbit already speaks of IMI as a potential future partner - but European and US firms are likely to play a major part in the privatisation process, gaining access to cutting-edge technologies and further opening the global marketplace to Israeli innovation.
IMI – the first target
State-owned Israel Military Industries (IMI) has been chosen to start the country's industrial privatisation process, say senior officials at the Ramat Hasharon-based company.
"We will become the first large-scale company privatised within the defence industry," says IMI chairman Arie Mizrachi. "The Ministry of Finance is determined to go with the management of IMI to privatise the company in one piece." He cites UK company BAE Systems' acquisition of formerly state-owned Royal Ordnance as a possible model for the deal. The company could be opened up for sale to an Israeli or strategic partner from Europe or the USA from late 2005 or during 2006, he says.
The attractions of privatisation are clear: IMI maintains an extensive site on prime land near one of Israel's most sought-after districts, with this real estate potentially worth $2.3 billion. With the company valued at about $300 million, the disposal of some of this land could compensate the state for years of poor return, while IMI's capabilities as the Israel Defence Force's warhead house will attract investing companies. "We are a small-scale company but we have unique capabilities," says Mizrachi.
The recent disposal of three subsidiary companies will see IMI's sales dip from $480.8 million in 2003 to about $420 million this year, and its targeted payroll of 2,300-2,500 staff is a shadow of its 11,000 employees in 1990. The company also remains hamstrung by an annual pension burden of about $25 million - equal to its profit in 2003 - but it has an order backlog of around $1.3 billion.
One of IMI's key assets is also its smallest, with its advanced systems division employing just 150 full-time staff. The unit has been responsible for developing the Improved Tactical Air-Launched Decoy now in US Navy use, plus air-launched weapons such as the Delilah standoff-range missile and the Modular Standoff Vehicle submunitions dispenser. IMI's aerial ammunition directorate also offers a wide range of air-launched weapons, including penetrator warhead-equipped bombs, and has a new low-intensity warhead intended to minimise collateral damage. The company is also working with state-owned counterpart Rafael to develop a series of small-diameter bombs and warheads with adjustable effects.
Making do with less – IAI teams up on trainers
As Israel's largest defence concern, Israel Aircraft Industries (IAI) has a proud tradition as an airframe manufacturer, and more recently as an upgrade specialist. However, the company's last high-profile development project - the collaborative creation of the Lavi fighter with the USA - was cancelled at the prototype stage on cost grounds in the late 1980s.
IAI does not produce its own fighters today, and with fighter modernisation deals becoming less frequent, it has had to broaden its scope to consider movement into new markets. This led to the creation of the Astra and Galaxy business jets, now integrated into the Gulfstream family, but more recently the company has turned to the jet trainer market.
Preliminary design work was conducted by IAI some years ago for a new advanced trainer for the military sector, but faced with a potentially small market, it decided it could not accept non-recurring costs of $150-200 million to launch development. It then teamed with the USA's Aviation Technologies Group (ATG) to develop and promote the Javelin - a very light jet created for the business/leisure market, but with clear potential for adaptation for military use.
Now close to its debut flight in the USA, the Javelin will have a unit cost of $2.5-3 million in civilian guise, a maximum speed of M0.9 and low operating costs. IAI is bringing its avionics and design experience to the project, and believes an enhanced military variant could be launched around 2006 (Flight International, 16-22 November). "We are working together on the detailed design of the civil version, so this will minimise our investment when we go to the military version," says IAI vice-president and Military Aircraft Group general manager Menahem Shmul. Design enhancements needed for the latter type include integration of new engines and the addition of ejection seats and new avionics, such as a radar emulator.
With a targeted unit cost of $6-7 million, the military Javelin will cost half as much as Aermacchi's M346, says Shmul.
Source: Flight International