TEL AVIV, Israel — Citing a dangerous 40 percent drop in anticipated exports this year, Israeli defense industry leaders are exhorting the government of Prime Minister Benjamin Netanyahu to boost domestic defense spending or suffer the consequences of eroded competitiveness and possible layoffs.

In a letter to Netanyahu, first reported by Israel's TheMarker financial daily, leading executives of Israel's four largest defense firms flagged a steady plunge in exports since 2012, when new contracts signed reached an all-time high of US$7.5 billion.

According to leaders from state-owned Israel Aerospace Industries (IAI), Rafael and Israel Military Industries (IMI), as well as publicly traded Elbit Systems, exports for 2015 are projected to drop as low as $4 billion.

"The Israeli defense industry finds itself in a clear crisis. From $7.5 billion in defense exports in 2012, we dropped to $6.5 billion in 2013, to $5.5 billion in 2014 and projections for this year are between $4 billion to $4.5 billion," industry leaders wrote.

The letter, obtained by Defense News, was signed by Miki Federman, chairman of Elbit, and Elbit CEO Butzi Machlis; Rafi Ma'or, chairman of IAI, and IAI chief executive Yossi Weiss; Yitzhak Gat, chairman of Rafael, and outgoing managing director Didi Ya'ari; and IMI's chairman Udi Adam and managing director Avi Felder.

"For several years now, the Israel Defense Forces and the Ministry of Defense does not have an organized multiyear plan. In parallel, big changes are transpiring in the world of defense, with smaller budgets and greater competition. The desire for procurement from Israel is in decline," executives wrote.

Industry titans requested a meeting with Netanyahu prior to determination of the 2016 defense budget, which is planned for Nov. 19.

As it now stands, the Israeli defense budget published by the Treasury for 2016 is 56.1 billion shekels, a figure which includes $3.1 billion (12.08 billion shekels). Netanyahu has pledged to up that amount, but not by the 62 billion to 63 billion shekels demanded by Israeli Defense Minister Moshe Ya'alon.

Israeli defense exports have experienced a sharp decline since 2012.

Photo Credit: Israel Ministry of Defense

Teams from the Israeli finance and defense ministries have been trying for more than a month to reach consensus on a top-line 2016 defense budget prior to intervention by Netanyahu, who spent most of last week in Washington, primarily to discuss Israel's needs with US President Barack Obama for a new 10-year military aid package to follow a current agreement that expires in October 2017.

In attempts to sway the Treasury, industry leaders met Nov. 8 with Finance Minister Moshe Kahlon. In a seven-page PowerPoint presentation, also first reported by TheMarker and subsequently obtained by Defense News, executives highlighted the importance of the defense industry to Israel's economy.

Among the highlights:

  • Annual output of the Israeli defense industry is some $8 billion, with added value to the entire economy of some 35 percent to 40 percent to that amount.
  • The defense industry contributes to some 3 percent of Israel's gross domestic product.
  • It is responsible for some 15 percent of all national exports, excluding diamonds.
  • The aerospace and defense industry includes some 600 firms — mostly small and medium businesses. It directly employs 50,000 and indirectly supports another 50,000 suppliers.
  • Compared to profit margins traditionally associated with leading global defense firms, Israeli firms on average show 4.5 percent to 5.5 percent profitability.

In addition to greater domestic defense spending, executives are seeking additional assistance by the Ministry of Defense and other relevant government agencies in terms of liberalized export licensing and security classification procedures.

"The defense budget that is materializing for 2015-2016 presents even greater crisis for the defense industries, principally the amount of the shekel budget allocated for domestic procurement. … It will not allow MoD or the IDF to put wind in our sails," executives wrote in their letter.

In a Nov. 11 commentary, Ora Koren, the economic reporter who first broke the story, assailed the presumption that it is the government's duty to put "wind in the sails" of Israeli defense firms. Moreover, she suggested the lobbying effort was a manipulation on the part of MoD to gain plus-ups in its upcoming budget.

"The enlistment of the heads of the defense industries to grow the budget is embarrassing, not that they have much of a choice. They have to show their central customer that they are there for them when needed," she wrote. "There's no reason to grow the defense budget in order to assist them. If their businesses are failing, the public doesn't need to support them by way of a defense budget that is not transparent.

"The heads of industry need to do what any other industrial firm does when its income is constricted through efficiencies, greater investment in innovation and to distinguish itself from its competition. Then they will sell more."

None of the firms chose to comment on the high-level lobbying effort or on the projected drop in 2015 defense exports.

However, based on third quarter financial results released Nov. 11 by Elbit, it appears that Israel's leading and non-state-owned firm went along with fellow industry chiefs for the sake of solidarity, rather than out of company distress.

According to Elbit's financial data, third quarter 2015 income was $764.8 million, a nearly 6 percent growth from the same period last year. Similarly, the firm reported a growth in profit; some 30.5 percent of revenues as compared with 28.8 percent of revenues in last year's third quarter.

Email: bopallrome@defensenews.com

About Barbara Opall-Rome

Opall-Rome is Israel bureau chief for Defense News. She has been covering U.S.-Israel strategic cooperation, Mideast security and missile defense since May 1988. She lives north of Tel Aviv. Visit her website at www.opall-rome.com.

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