Major investment by Israel's MoD to shore up industrial base

Israel’s Green Pine radar system, sold to the US amongst others.

Israel MoD Aims for $10B in Annual Export Sales

By Barbara Opall-Rome,  Defense News,
January 08, 2013

HERZLIYA, Israel — Israel’s Defense Ministry is launching several initiatives to safeguard its industrial base, cultivate emerging markets and ultimately boost annual exports to $10 billion from the $7 billion levels of recent years.

Measures include easing export license procedures and expanding government support for the hundreds of small- and medium-sized firms (SMEs) now accounting for a mere 2 percent of annual Israeli exports.

Retired Brig. Gen. Shmaya Avieli, director of the ministry’s agency for defense exports and defense cooperation (SIBAT), said Israel’s four largest defense companies claim 98 percent of total exports. But at times, it is the smaller firms and boutique enterprises that can provide innovative solutions more quickly, he said.

At a December  24 conference dedicated to Israel’s SME sector, Avieli said MoD is encouraging domestic and international partnerships with second- and third-tier firms as one way to secure a greater share of the global market.

“You may know how to bring the right, rapid solution, and therefore you are important to us … even if in two or three or eight years down the road, you get swallowed up by the big firms,” Avieli told participating industry executives and entrepreneurs.

He said MoD’s focus on the SME sector, defined as companies with no more than 100 employees and annual turnover of less than 400 million shekels ($108 million), moved into high gear in 2012, with the establishment of an SME business development office within SIBAT. By spring, he said SIBAT plans to inaugurate an exhibition center to showcase local technologies and systems for visiting dignitaries and procurement officers.

In parallel, defense officials said they are easing eligibility barriers for SMEs seeking to compete for MoD contracts and expanding their access to defense research and development (R&D) funding.

“We want swift, innovative and flexible solutions. We want to bring in SMEs that provide added value to the larger firms,” Brig. Gen. Eitan Eshel, R&D chief of the ministry’s MAFAT defense research and development directorate, told conference participants.

MoD Director-General Udi Shani said he hoped to raise the annual central R&D budget from 700 million shekels to 850 million shekels, “as long as these [technology development] opportunities expand to more firms.

“We have to be creative. As an organization, we need to change to provide expanded opportunities for more firms,” Shani, a former director of SIBAT, told conference participants.

He cited plans to establish outreach funds with developing countries that are not members of the Organization for Economic Cooperation and Development (OECD) to cultivate new markets. According to Shani, such funds will serve as an incubator for future defense trade and will focus primarily on medium-sized firms.

So far, Colombia and Vietnam have been tapped for the joint development initiative, but Shani said he hopes to add more countries in the coming years.

“It’s an extraordinary patent [vehicle] for countries where the laws and procedures are beyond OECD. … With developing nations, you have more opportunities to forge a pathway toward future cooperation,” Shani said.

He declined to specify the budget earmarked for the joint development fund or to elaborate on projects eyed for select non-OECD states.

2012: Year of Recovery

A tally of new contracts signed in 2012 won’t be finalized until April, but early indications point to a year of recovery from 2011, when Israeli export sales plummeted to some $6 billion from a 2009 peak of nearly $7.5 billion.

Avieli attributed the 2011 slump to global economic conditions, reduced defense spending in much of the world and the drawdown of allied forces in Iraq and Afghanistan.

“We had a big drop in 2011, but it looks like we’re on our way back up to $7 billion,” Avieli said.

The SIBAT director alluded to diplomatic commitments and geopolitical interests restricting Israeli exports to key markets.

“We do not sell to China,” Avieli said, a reference to longstanding Israeli commitments with the United States.

While he did not offer additional examples, defense officials here cited an indefinite hold on exports to Turkey; a prolonged prohibition on major sales to Taiwan out of deference to China, a politically important member of the U.N. Security Council; and extremely rigid restrictions in Georgia and a few other nations out of consideration to Russia.

“We’re focusing on a market of $30 billion to $35 billion, and we’re proud to claim about 20 percent of that market,” Avieli said.

As for his future goal of reaching $10 billion in annual sales, Avieli said, “We need to figure out how we intend to break through that glass ceiling.”

Third quarter reports from Elbit Systems and Israel Aerospace Industries (IAI), Israel’s two largest defense companies, whose financial reports are publicly available, validate SIBAT’s optimistic year-end projections for 2012.

Elbit, Israel’s fastest growing and only major privately held, publicly traded company, reported $2 billion in sales for the first nine months of 2012. That’s just $800 million short of the $2.8 billion in revenue reported for all of 2011.

At IAI, the upswing in military sales during 2012 was even more dramatic, due to two megacontracts: a $1.6 billion deal for radars, UAVs and other gear with Azerbaijan concluded in January, and a $932 million sale of a satellite and early warning aircraft to Italy. Just those two deals alone exceed the company’s total military sales reported to the Tel Aviv Stock Exchange for 2011.