As the founding head of Elbit's Land Systems Division more than a decade ago, Bezhalel "Butzy" Machlis led integration of the firm's acquisition of Israel's Soltam Systems while spearheading one of the firm's most lucrative programs, a digitized C4I net for the Israel Defense Forces.
Now entering his fourth year as Elbit chief executive, Machlis is presiding over a rapidly burgeoning land portfolio that may soon include acquisition of state-owned Israel Military Industries (IMI). All the while, he remains intent on nurturing Elbit's long established airborne systems, electro-optics and C4ISR sectors through an expanding global footprint of local subsidiaries. He recently spoke about it with Barbara Opall-Rome, Defense News Israel Bureau chief.
Land systems comprised about US$559 million of the $3.1 billion in sales reported in 2015. That's more than double land systems sales from 2014, even though your topline didn't change that much. Is Elbit's portfolio tilting away from its core sectors in favor of land?
The airborne portfolio that established us as a world leader in avionics and upgrades remains very relevant and strong. At the same time, I'm very proud of our land systems sector, which is growing rapidly. Both sectors, as well as other core business areas, are extremely relevant. One does not come at the expense of another.
On the contrary, our ability to take technologies from different parts of the company and tailor them to needs of the customer gives us our edge. I don't know many companies in the world where such a broad range of core competencies — whether in electro-optics, radars, SIGINT, unmanned platforms, networked C4ISR and cyber — are synergistically integrated under one roof across all warfighting sectors.
What are some examples of this cross-pollination across business sectors?
A. We're introducing at Eurosatory a helmet-mounted system for tanks and armored vehicles, based on technologies used worldwide with helicopters and fighter planes, including the F-35. Iron Vision, as we call it, is a relevant example of an innovative concept developed in the field of air warfare that, in my view, can bring an innovative, operational edge for ground warfare.
Another example is all that we offer in the field of intelligence. We established a new ISTAR company that merged all our unmanned systems and electro-optics capabilities. This company has a free hand in developing the full spectrum of ISTAR capabilities developed at Elbit, including EW and tactical command, control and communications.
What's holding up privatization of IMI? Isn't Elbit the sole remaining bidder among the many firms that expressed initial interest in the storied, yet financially problematic state-owned firm, valued at some $650 million?
We are indeed the only bidder left, and there is a process. But it's a complicated process and I can't commit to when it will happen. What is known is that there was a government decision to privatize IMI. There were some debates about a flawed process; and then a decision was made to fix the process and continue only with us. But you'll need to ask the decision makers when this process will be concluded. I think we will know quite soon.
How will IMI fit into the Elbit portfolio?
There is synergy between the activities of Elbit and IMI, mainly in the area of fire control solutions, heavy rockets, howitzers, mortars and the upgrading of land platforms. So I believe merging IMI into Elbit will strengthen our portfolio and market position. But it's not an easy process. The company has had some difficulties. But for the long term, it's a good strategy for us and I hope it happens.
Elbit's was involved for many years with state-owned Israel Aerospace Industries on unmanned ground systems, but that venture, called G-NIUS recently collapsed after failing to garner sales. Wasn't that a setback for your ground portfolio?
On the contrary. We believe in the concept and the capabilities that unmanned ground systems offer to users. We are continuing to invest in this field and I think we'll do a lot better now that it's under our full control. I have no doubt it will integrate very well into our portfolio now that it's 100 percent in our hands.
When do you think you'll be able to translate your belief in the unmanned ground system concept into firm sales?
This is a strategic investment area for us whose time, I am sure, will eventually come. Many nations around the world are looking for new methods of force protection, first and foremost to save lives, but also out of cost-saving interests. The unmanned field in general is at the heart of our strategy. We believe that wherever possible, users will gain a qualitative edge through the mating of our spectrum of payloads with unmanned systems, whether it is in the air – where we are already world leaders – or at sea, where our systems can be used to advantage in the anti-mine and anti-submarine role or on the ground.
Full control seems to be your theme at Elbit, especially with regard to your global business. Please explain.
Our company is very vertical in our outlook. We have a strong international presence and many subsidiaries with which we cooperate around the world. But our strategy is to retain full control of the technology from end to end. We control the basic technologies and on top of that, we do systems, and on top of that, we do systems of systems. That's our added value. If you are dependent on a third party, the customer or partner gets a less intimately tailored solution.
In Israel, Elbit dominates the market for outsourced services and private financing initiatives (PFI). Is this also part of your full control strategy?
Outsourcing is a growing trend in many places where customers are looking to shift their risks to someone else to save money. And, yes, we own this market in Israel. We do the flight school in Hatzerim [a major Israel Air Force base]; we provide trainer aircraft of all types under private-financing initiatives; and just recently in Israel, we started supporting the communications equipment of the IDF. We also have service arrangements in Israel and other countries with our unmanned systems and avionics.
So if the customer desires, we provide training, maintenance and other services. But we do it only in areas that are complimentary to our major activities. This is all part of the package of systems and services that we control.
What's your strategy with respect to offsets, which are viewed by many as a necessarily evil of doing business overseas?
We don't really do offsets; because that's something you are forced to do. What we do is industrial cooperation. That's because in all of our strategic customer markets, we have a local presence. Often it is a very sizable local presence with many hundreds of employees, and this allows us to do significant work with our in-country partners. So what we do is really the opposite concept of offsets, given the fact that we're local. I'm not coming from the outside.
What are your key markets, in terms of sales volume?
It's a matter of public record. In 2015, we reported 19.8 percent in Israel; 27 percent in North America; 25.8 percent in the Asia-Pacific; 16 percent in Europe and 10.5 percent in Latin America.
We are seeing strength in many of our target markets, particularly in the Asia Pacific, and a resumption of growth in European defense spending. The orders we have won in the past few months highlights the diversification in our business and how our target markets are growing across many regions.
And the "other" category, which you reported at 0.9 percent of 2015 sales? Is central Asia in general and Azerbaijan in particular a target market?
Yes. These are relevant markets.
Prior to the rupture of defense ties in 2010, Turkey was a major market for Elbit and other top-tier Israeli firms? With talk of a rapprochement between the governments of Prime Minister Netanyahu and President Erdogan, do you foresee a return to the status quo ante?
My answer to this is very simple: we are subordinate to the Israel Ministry of Defense. The keys are with them. Whatever the government decides, we will be ready.
Cyber. Elbit was the first Israeli defense firm to get into this business in a big way, yet you recently lost a major bid to state-owned Rafael to establish a Cyber Emergency Response Team (CERT) for the prime minister's office. You must be disappointed.
First of all, cyber is a very broad term, involving hundreds, if not thousands of sub-sectors. Yes, it's true that we competed for the national cyber CERT, but I don't think it changes the fact that we are leading in the field of cyber. For example, there was a big international cyber conference in San Francisco a few months ago where we were selected as among the most attractive cyber firms in the world.
So there are providers of cyber systems and cyber products and each one needs to decide where he wants to focus. Therefore, in the segments where we have elected to focus, we have a very strong added value and our cyber business is growing.
And Elbit is focusing on what?
We've defined as our core segments cyber collection, data analytics and defensive cyber from the level of products and systems. We have more than 500 engineers with our new firm, called Cyberbit and we have activities across the defense, civilian and commercial markets.