Chapter 5 Israel% Defense Industry: Evolution and Prospects Contents Page INTRODUCTION AND OVERVIEW ...... 85 CAUSES OF THE CURRENT PREDICAMENT OF THE INDUSTRY ...... 86 Impact of General and Universal Developments ...... 86 Impact of Israeli Specific Factors ...... 87 READJUSTMENT OF THE ISRAELI DEFENSE INDUSTRY: 1984-90 ...... 89 OUTLOOK FOR THE FUTURE ...... 91 Meeting the IDF’s Procurement Requirements ...... 91 Alternative Futures for the Defense Industry ...... 91 EVOLUTION OF ISRAEL’S DEFENSE INDUSTRIES ...... 93 From 1948 to 1967 ...... 93 From 1967 to 1984 ...... 94 1985 to Present ...... 95 THE CURRENT STRUCTURE OF THE INDUSTRY ...... 95 Inhouse Military Organizations ...... 95 Ministry of Defense Companies ...... 95 Government-owned Corporations ...... 96 Public-Sector Corporations ...... 97 Private-Sector Corporations ...... 98 DOMESTIC AND FOREIGN SALES ...... 100 THE U.S. CONNECTION ...... 100

Figures Figure Page 5-1. Change in Israeli Defense Sales and Employment, 1985-89 ...... 89 5-2. Israeli Defense Exports and Backlog Orders, 1986-89 ...... 92

Tables Table Page 5-1. Israel’s Defense Industries: Main Developments ...... 85 5-2. Basic Data on Principal Israeli Defense Firms, 1989 ...... 86 5-3. Ratio of Exports to Sales for Leading Israeli Defense Companies ...... 87 5-4. Selected Arms Orders, Deliveries and Licensed Production of Israeli Weapon Systems, 1986-88 ...... 101 Chapter 5 Israel’s Defense Industry: Evolution and Prospects

INTRODUCTION AND OVERVIEW the uniquely intimate cooperation between the weapons developers and users in Israel. These sales The origins of Israel’s defense industry can be advantages more than offset several severe limita- traced to the small clandestine arms manufacturing tions of the Israeli defense industry, most promi- facilities of the Jewish Yishuv in Palestine. After nently formidable foreign and domestic political gaining independence in 1948, the newly born state barriers to Israeli defense sales, as well as scarce absorbed these facilities within the Israel Defense financial resources to support exports through provi- Forces (IDF) and the Ministry of Defense (MOD). It sion of easy long-term credit. gradually expanded and upgraded these state-owned facilities to meet the state’s security requirements Despite the industry’s export gains, its growth and and modest industrial capabilities of the time. By diversification peaked in the early 1980s, and has 1967, Israel possessed an impressive indigenous since 1984 been partially reversed. The industry was capability (for a developing country) for arms severely hit by a combination of global as well as maintenance, retrofit, licensed-production, and in Israeli-specific factors. These consisted of increas- some cases, weapons development as well. ingly intense global competition for shrinking pro- curement funds, loss of several lucrative foreign Following the French arms embargo against Israel clients (initially Iran and ultimately the Republic of in 1967, Israel embarked on a highly ambitious South Africa as well), and sustained severe cutbacks course of expanding, diversifying, and modernizing in the Israeli defense budget, in particular for its defense industry. The goal was to develop an domestic arms procurement. Consequently, since industrial capability to meet most, and in certain 1985 the industry has been forced to undergo a areas all, of the state’s weapons requirements. To painful readjustment to the new market realities, meet this self-sufficiency goal, a massive investment which has profoundly transformed the industry. The of human and financial resources was made in the total workforce was cut significantly, sounder finan- defense sector. Consequently, by the early 1970s the cial management techniques were introduced, mar- Israeli defense industry, which by this time consisted keting was increasingly reoriented toward the export of many private as well as public corporations, was (most prominently U. S.) market, specialization and able to develop and produce domestically a range of concentration in several military product areas were advanced weapons systems. In addition to a main emphasized, and modest diversification into civilian battle tank, a self-propelled howitzer, a jet fighter, products was introduced (see tables 5-1 and 5-2). missile fast patrol boats, and mini-remotely piloted vehicles (RPVS), these weapon systems included a The readjustment of the Israeli defense industry broad spectrum of ammunition and firearms, mis- has met with considerable short-term success, and siles, avionics, communications, and electronic war- by 1990 the industry had accumulated an unprece- fare systems. Some of these systems nonetheless dented backlog of orders. Yet current market reali- continued to contain foreign (especially U. S.) com- ties still cast doubt over the industry’s long-term ponents, most prominently tank and jet engines. prospects. Further restructuring seems absolutely necessary for the survival of many Israeli defense Although domestic arms requirements have been fins. Privatisation of certain state-owned defense the principal driving force behind the industry’s growth, its surplus capacity was increasingly di- Table 5-1—lsrael’s Defense Industries: rected at foreign markets, especially in Latin Amer- Main Developments ica, Southeast Asia, South Africa, Iran, and Western Europe. By the middle 1980s, Israel was exporting 1985 1987 1989 approximately $.5 billion in arms per year. This Total sales (index 1985 = 100) . . 100 99.9 95 Exports as a percent of sales . . . 47 55 59 level of exports was achieved largely due to the Number of workers ...... 62,600 61,600 46,500 reputation of the industry’s products, a reputation Sales per worker (dollars) ...... 55,000 56,000 70,000 that owes much to the IDF’s combat experience and SOURCE: Economic Advisor to Israeli Ministry of Defense.

–85– Table 5-2—Basic Data on Principal Israeli most traditional weapon manufacturers (notably the Defense Firms, 1989 Soviet Union and the United States, the People’s Republic of China, Germany, and even Switzerland Exports and Sweden as well). These have come about on top Turnover Employees (as a percent Company (millions of $) (thousands) of sales) of the already lenient weapon export policies of other traditional Western arms producing nations IAI ...... 1,248 16.1 75 IMI ...... 525 12.1 63 (e.g., France and the United Kingdom). Tadiran ...... 654 7.1 41 Rafael ...... 355 5.8 25 The impact of these supply-side developments on Elbit ...... 158 1.8 62 the structure of the market was enhanced consider- EI-Op ...... 104 1.2 28 Elisra ...... 104 0.9 41 ably in the 1980s by a decline in the global demand Ordain...... 67 0.5 55 for conventional arms. This decline was caused by Rada ...... 22 0.2 82 a combination of economic constraints on arms Ziklon ...... 20 0.2 61 procurement and diminishing defense requirements. SOURCE: Economic Advisor to lsraeli Ministry of Defense. The economic constraints are attributable in part to corporations is under discussion, although its pros- lower oil revenues, higher social welfare expendi- pects seem slim given the diminishing attractiveness tures, and the diminishing purchasing power of of defense business. Thus, the most likely future defense budgets caused by the rapidly escalating course of development for the industry is further costs of modem weapons systems. The lower acceleration of earlier trends toward diversification, requirements for weapons may be traced to easing of domestic consolidation, product specialization, and interstate tensions in several prominent global and cooperative international ventures, especially with regional contexts. U.S. corporations. The transformation of the international arms market has had a profound impact on the patterns CAUSES OF THE CURRENT and terms of weapons trade. Specifically, upgrading PREDICAMENT OF THE existing platforms and purchase of defense technol- INDUSTRY ogy (through licensed production and other business arrangements) occurs in place of much new procure- The Israeli defense industry has experienced ment. In addition, extensive countertrade (barter and considerable turbulence since the early 1980s. The offsets) provisions and generous long-term financ- performance of the industry has been adversely ing have become the norm in procurement of defense affected by a combination of broad international as equipment, especially by developing countries. Fi- well as unique Israeli developments. nally, bilateral and multilateral international joint Impact of General and Universal ventures for development and production of defense products have grown significantly in both number Developments and importance. They are commonly sought as a Over the past two decades, the international arms means to diminish the rapidly mounting risks and market has changed from an oligopolistic sellers’ costs inherent in new weapons development and to market to a highly competitive buyers’ market. This secure access to both technology and foreign mar- transformation has come about as a result of several kets. This process has been made possible by a lower interrelated developments affecting both the supply degree of product differentiation as well as the and demand for defense equipment. growing potential for customization through modifi- cation of software and sub-systems rather than One supply-side development has been the emer- substantial alteration of basic platform design. gence of many new weapons producers (especially in Southern Europe and the developing countries), as These developments have exerted significant and well as the growth in size, diversity, and sophistica- adverse influences on the Israeli defense industry. tion of already established defense industrial pro- The overall decline in demand for arms came about ducers (e.g., Brazil, India, and Israel). Another precisely at the time that the indigenous Israeli arms important development has been the liberalization industry had become increasingly dependent on and commercialization of arms export policies of exports (see table 5-3). Moreover, by virtue of its Chapter 5--Israel’s Defense Industry: Evolution and Prospects • 87

Table 5-3-Ratio of Exports to Sales for Leading Israeli political sensitivities or U.S. pressures (e.g., South Defense Companies (percent) Africa and Iran). Sales restrictions on transfer to third parties of defense products containing U.S. 1985 1989 components (e.g., Israeli-made jet fighters or tanks Israel Aircraft Industry (lAl)...... 60 75 using American-made engines) also apply. Israel Military Industries (lMl)...... 81 63 Elbit ...... 55 62 Operational and security requirements constitute Radar...... 49 61 a further barrier to Israeli companies seeking to Rafael ...... 40 25 export some of their more advanced indigenous SOURCE: Economic Advisor to Israeli Ministry of Defense. products to certain lucrative but politically unrelia- ble foreign customers. Finally, Israeli companies small size, limited resources, and minuscule civilian face broad protectionist tendencies prevailing in market, Israel found it exceptionally difficult to some of the world’s largest arms markets (the United provide long-term financing and countertrade op- States, Western Europe, and Japan). portunities to support the export drive of its defense corporations. Joint ventures and technology transfer The cumulative effect of these factors is to restrict have also proven especially problematic for Israeli severely the share of the arms market accessible to defense-firms due to the combination of Israel’s the Israeli defense industry, even before economic political isolation and its tight secrecy requirements and industrial considerations are introduced. These, on defense technology. in turn, further complicate the picture for the industry. From an Israeli perspective, the only positive aspect of these trends has been the ascendancy of Some of the more salient features of the Israeli defense systems modernization and upgrading. Here, arms industry that affect its export prospects are its rather than in the production of main combat size and complexity. The tremendous post-1967 platforms, Israeli defense corporations have a rela- growth in size, diversity, and sophistication of tive advantage over their foreign competitors, an Israel’s defense industry has been driven almost advantage stemming largely from the extensive exclusively by domestic defense requirements. Still, operational and combat experience available to the this growth was initially beneficial to the industry’s industry through the IDF. export potential as well, enhancing its appeal as a viable alternative supplier to the major powers who Impact of Israeli Specific Factors had originally dominated the market. By the mid-1980s, however, the industry’s size The growth of the Israeli indigenous arms indus- and sophistication began to dampen its export try has always been constrained by severe structural potential. By this time Israel was sinking much of its limitations on the size of both the domestic and energy and resources into the production of main foreign markets for its products. The domestic combat platforms, which it could not export due to constraints result from the limited size of the local political restrictions. Moreover, by virtue of their arms market, whereas the foreign market constraints sophistication, many of the industry’s products no are grounded in Israel’s political isolation. longer appeared suited to Israel’s traditional custom- Israeli companies and products are politically ers in the lower end of the market, whereas the barred from entering a sizable segment of the global potential customers for the more advanced products arms market-the Arab nations and most of the seemed to lie in politically problematic markets for Islamic world. In addition, other potential markets in Israel (western Europe and the United States). Europe and the Far East are strictly off-limits for any Furthermore, Israeli defense corporations would no defense product bearing a clear Israeli identity or are longer vie for small but profitable specialized niches easily traceable to Israel. Similar if slightly less in the market, but choose to compete for the big severe inhibitions also apply in these regions to joint contracts, which inevitably pitted Israeli defense ventures involving Israeli companies. Moreover, corporations against some of the industry giants, Israeli defense corporations are prohibited from severel“ “y curtailing profit margins in the process. selling many products (and to several prominent Finally, entry of many new suppliers into the lower potential foreign clients), due either to Israeli end of the market, many of which enjoy the benefit

292-877 0 - 91 - 4 : QL 3 88 ● Global Arms Trade of cheap labor, have largely displaced Israeli compa- establishment was engaging in unusually heavy nies from some of their more profitable traditional operational activity, initially in the context of the export product lines (e.g., mortar, tank, and artillery war in Lebanon (1982-85) and the Palestinian ammunition). uprising in the occupied territories (since 1987). Although the operational costs in each case amounted All of these export-related problems of the Israeli to several billion U.S. dollars, the Israeli defense defense industry deepened in the 1980s. This has establishment was forced to absorb some of the costs been the result of the overall developments on the within its already depressed budget. But despite the international arms market, continuation and exacer- severe defense budgetary crisis since the early bation of the Israeli industry’s specific structural 1980s, the IDF order of battle was only cut back constraints, and finally the loss (due to political slowly and modestly during this period. Conse- factors) of two of its most highly valued clients quently, it was defense procurement that absorbed (initially Iran and then, gradually, South Africa as the cost of the defense budget crisis. well). The “peace dividend” of recent develop- ments in Europe looms on the horizon as another Two factors contributed to the financial crisis of major setback to the Israeli defense industry. The the Israeli defense industry. One is the diminished Federal Republic of Germany, in particular, was the buying power of the depressed Israeli currency. largest Western client of the Israeli defense industry. Most of it is naturally spent on salaries, infrastruc- In the wake of reunification of Germany and the ture, operations, and the like. The other is the U.S. conclusion of the Conventional Forces in Europe stipulation that most of its aid to Israel (all but (CFE) talks, this market may deteriorate as well. $400-$450 million in offshore procurement funds) The adverse developments on the export front be spent on procurement of American goods. Israeli have coincided with bleak economic conditions in defense procurement thus had to be increasingly Israel. Since the early 1980s, the industry has reoriented toward U.S. sources. Recently, budgetary increasingly depended on foreign sales for its constraints have tightened to the point that the Israeli prosperity, in some cases even for the survival of MOD finds it necessary to divert to U.S. suppliers’ firms. The economic situation in Israel has not only purchases of certain items it has traditionally bought undermined the defense industry’s domestic sales locally. This diversion has been deepened by the but has also, in many cases, deprived the industry of government’s economic policy, which has held one of its leading export leverages—the so called constant the rate of exchange between the Israeli “IDF stamp of approval” for its products attained currency and the U.S. dollar for extended periods through prior sales to the IDF. while inflation and labor costs have been steadily rising at an average rate of roughly 15 percent. The Rising government deficits, inflation, and foreign adverse impact of this policy on the indigenous debt coupled With heavy cumulative investment in industry’s competitive edge in general, and on modernizing and expanding the ranks of the IDF in competition with U.S. suppliers in particular, is the post-1973 Yom Kippur War period have forced clear. successive Israeli governments since 1983 to cut and then freeze the local component of the Israeli The burden of the defense budget crisis of the defense budget. The budget was cut from an annual 1980s was not allocated evenly within the indige- average of roughly $3.2 billion from 1973 until 1983 nous defense industry. Certain government-owned to roughly $2.6 billion per year since. During the corporations (Israel Aircraft Industries (IAI) and to same period the second component of the Israeli defense budget—U.S. military aid-has remained a lesser extent Rafael) were spared some of the cuts largely stagnant, frozen at the level of approximately and/or compensated for much of their losses. IAI, in particular, enjoyed preferential treatment due to its $1.8 billion per year. In real terms, it has declined signtificantly particularly in comparison to the rap- strong domestic political clout. It has been receiving idly escalating costs (above and beyond inflation) of by far the greatest share of the offshore procurement defense products. component of U.S. military aid to Israel, initially for the Lavi jet fighter project, and since cancellation of The decline in both components of the defense the Lavi in 1987 for some of its substitutes. Most budget took place at a time when the defense public and private defense companies were, conse- Chapter 5--Israel’s Defense Industry: Evolution and Prospects ● 89 quently, quite severely hit; many of their contracts through 1987 Israeli defense exports exceeded $0.5 were stretched, scaled back, or terminated outright. billion, and the industry had accumulated an unprec- edented backlog of orders exceeding $3.5 billion. READJUSTMENT OF THE Furthermore, between 1985 and 1989 the industry’s ISRAELI DEFENSE INDUSTRY: exports rose sharply from 47 percent to roughly 60 percent of total sales. Yet the profitability of much 1984-90 of the arms exports was at best marginal. The Signs of the crisis awaiting the Israeli defense industry, primarily state-owned, had put on fat industry were evident in the early 1980s. Yet its during the years in which it operated mostly in the magnitude and severity, its underlying causes, and sheltered environment of the captive domestic most importantly, its enduring nature, were not market. But the new budget realities precluded initially understood. Defense budget cuts were continued government subsidization of domestic widely believed to be transient; many defense arms manufacturers and forced significant decreases industrialists expected to be compensated for them in government R&D support. within a year or two. Moreover, hefty financing profits (facilitated by an inflation rate of 600 to 800 Facing intense competition in the global defense percent) permitted many defense firms to gloss over marketplace, the defense industry was forced to operating losses. Thus, it was not until at least 1984 accompany its export drive with intense efforts to that tight defense budgets were seen as a permanent reduce costs and increase efficiency. For example, condition. The successful introduction, at that time, industry cut back dramatically on investments and of a government economic plan to curb inflation corporate-financed R&D budgets. The former have eliminated almost overnight the paper financing declined by roughly two-thirds between 1985 and profits of the industry, adding a sense of urgency to 1989, while the latter dropped on average by roughly the need to readjust quickly. 40 percent. In addition, over the 1985 to 1989 period, the defense industry has reduced its workforce by One major factor affecting the adjustment strategy approximately 25 percent (from a total of 62,600 to of Israeli defense firms was the widespread percep- 46,500) while only experiencing a 5-percent drop in tion that global arms markets would provide ample total sales (see figure 5-l). Average annual sales per business opportunities. The frost reaction to the employee in the industry have consequently risen domestic sales crisis consequently was an intense during the period from $55,000 to a somewhat more arms export drive. This drive was undertaken by acceptable level of $70,000. This figure fails to individual firms with strong encouragement and backing by the Ministry of Defense. The Minister of Figure 5-l-Change in Israeli Defense Sales and Defense at the time, Itzhak Rabin, made it clear to Employment, 1985-89 the defense industry leaders that he thought the ‘‘industry was oversized for Israel’s needs’ and that ‘‘only those who would export would survive. ’ 100 Defense sales Even Rafael, the Israeli company that most closely resembles an American national laboratory, was 90- - forced to go beyond R&D to full-scale production and ultimately to exports as well. To improve the industry’s export prospects, the Ministry launched an intense diplomatic drive to promote sales to and industrial cooperation with the United States through a series of Memoranda of Agreement (MOAs) and Memoranda of Understand- ing (MOUs). Similar, though less intense efforts were directed at West Germany and (according to 50 foreign press reports) South Africa. The arms export 1985 1986 1987 1988 1989 drive met with considerable short-term success, at Year least in terms of the volume of sales. From 1984 SOURCE: Economic Advisor to Israeli Ministry of Defense. 90 . Global Arms Trade reveal considerable variance in efficiency between the individual firms in the industry, which ranges from below $50,000 to over $120,000 in sales per employee. Finally, in order to overcome cash flow problems, many Israeli defense corporations have increased their presence in foreign financial mar- kets, and, in isolated cases, in the U.S. stock market as well.

For its part, the Ministry of Defense has assisted the industrial readjustment process by exercising leverage (as client, and in certain prominent cases owner as well, of defense manufacturers) in order to streamline the industry. Seeking to eliminate waste- Photo credit: U.S. Navy ful domestic competition, it has applied pressure on The Israeli Aircraft Industries (lAl) Kfir delta-wing tactical individual corporations to sell out, merge, and/or fighter was developed from the French Mirage V airframe form joint ventures with other Israeli companies after the French arms embargo of Israel in 1987. The operating in the same areas. These efforts have met aircraft began flying in 1974, and212 have been produced. From 1985 to 1989, the U.S. Navy and Marine Corps with partial success, the most prominent case being leased two squadrons for use as aggressor aircraft in the merger of the mini-RPV operations of Tadiran training, and flew them under the designation F-21A. In and IAI into one company, Mazlat, which was 1989, France agreed to sell to IAI five SNECMA engines, to be used in place of the airplane’s General Electric J79 initially jointly owned and ultimately completely engines. This was part of a renewed effort to market taken over by IAI. The MOD has also labored to Kfirs without U.S. export restrictions. capitalize on Israel’s political clout in the United States and the IDF’s appeal as a sizable and prestigious client in order to secure valuable indus- components and subsystems, as well as a compre- trial offsets for, and joint ventures with, Israeli hensive upgrade and modernization capability. companies. These efforts, however, have attained only a modest degree of success, mainly due to The second major product related development in Israel’s dependence on U.S. grant-in-aid for the bulk the 1985 to 1990 period pertains to the industry’s of its military procurement. experimentation with diversification to civilian prod- uct lines. These range from card-operated public As for the impact of the readjustment process on phon es (Israel Military Industries (IMI)), to diag- the industry’s product lines, two developments are nostic medical instrumentation (Rafael), civilian apparent in the post-1984 era: specialization and aerospace (IAI), and computer accessories (Elbit). diversification. The industry has been forced to This course of action has been pursued with little abandon the domestic production of main combat enthusiasm and considerable apprehension. The platforms, a dramatic reversal of the pattern estab- Israeli Government’s civilian R&D support budget lished since 1967 of intensive cultivation in Israel of is small. In addition, most Israeli arms manufactur- self-reliance in development and production of all ers lack prior experience in a truly competitive major weapons systems. The process, which had culminated in indigenous production of a modern jet environment, much less in dealing with the civilian fighter (the Kfir) and a light utility transport (Arava), marketplace. Some defense companies are still missile boats (Sa’ar 4 and 4.5), tanks (Merkava Mark recovering from misguided, half-hearted past en- 1,2, and 3), and a self-propelled howitzer, has come deavors in the civilian market (e.g., Rafael in to an abrupt end. With the cancellation of the Lavi electro-optics, IAI in executive jets, and Soltarn in jet fighter program in 1987, the Merkava tank pots and pans). There is widespread concern among remained the sole locally produced combat platform, defense industrialists that when it comes to market- and even its production was significantly scaled ing civilian products, Israeli companies do not enjoy back. In the future, industry will likely concentrate the same reputational advantage that they have on development and production of diverse military acquired in the defense area. Chapter 5--Israel’s Defense Industry: Evolution and Prospects . 91

OUTLOOK FOR THE FUTURE qualitative edge against its opponents. Severe domes- tic resource constraints coupled with the rapidly escalating cost of new weapons systems mandate Meeting the IDF’s that the IDF stretch to the limit the operational life Procurement Requirements of existing systems. The actual implication of this requirement is that the IDF, like many of its If a comprehensive Middle East peace settlement counterparts around the world, would be spending in cannot be reached, Israel’s arms requirements in the the future considerable and growing resources on 1990s are unlikely to fall below the level of the maintenance, modernization, and upgrading of its preceding decade. Despite the United States’ leading existing weapons systems. This is where the second role in the Persian Gulf War, Israel will continue to requirement comes in. In order for the IDF to enjoy rely on the IDF as its ultimate guarantor of security. operational autonomy, overcome foreign export And the IDF, in turn, will seek to acquire an restrictions on supply of state-of-the-art military uninterrupted supply of diverse state-of-the-art mili- equipment to Israel, and still maintain a qualitative tary hardware in order to preform its missions. This edge, Israel will likely expand its capacity to carry leaves open the question of how the IDF will meet out maintenance and upgrade work locally. its future hardware requirements. Many analysts expect that most future weapons Alternative Futures for the Defense Industry systems procured by the IDF will come from the Many of the original Israeli rationales for the United States. This expectation, however, is predi- development of a comprehensive and sophisticated cated on several critical assumptions. First, it is indigenous arms industry still pertain today. How- assumed that the IDF will adhere to its traditional ever, two factors that have influenced the shape of doctrine ascribing a critical role to mobility. This the industry have changed significantly over the past seems a reasonable assumption given the IDF’s reluctance to introduce anything but moderate changes decade. First, domestic demand for its products has both declined and undergone a profound change in in its doctrine to accommodate the ascendancy of nature. And second, the global arms market has also firepower over mobility on the battlefield. While been markedly transformed. The future of the firepower requirements could conceivably be satis- indigenous arms industry lies in systematic readjust- fied by indigenous sources, the same no longer holds ment to the new market conditions. The Israeli true for main air, sea, and to a lesser extent land defense industry today is significantly leaner and combat systems. These, with the exception of a main more efficient than it ever has been. Its successful battle tank, are no longer produced domestically, foreign marketing effort in recent years has left it and will therefore have to be imported in the future. with a backlog of orders that could serve to cushion Assuming further that the nature of U.S.-Israeli its restructuring process (see figure 5-2). Yet without political and security ties will not be fundamentally more drastic restructuring of the industry, its future altered, Israel will continue to import almost all of its may still look bleak. As the Director General of the foreign weapons systems from the United States. Israeli MOD, Maj. Gen. (ret.) David Ivri, has Israel, for its part, is unlikely to seek any fundamen- recently observed, the industry must complete its tal change in its intimate security cooperation with transformation over the next 3 years, since by that the United States. The United States might conceiv- time it will have largely exhausted its current ably do so, however, for a combination of domestic backlog of orders. This leaves the industry with little and foreign policy reasons. Short of a profound time in which to maneuver. change in U.S. policy toward Israel, affecting either Given these constraints, the Israeli defense indus- the magnitude of military aid and/or the willingness try might embark on a number of different courses. to sell arms, a significant reorientation of Israel’s Several involve extension and intensification of the defense procurement is highly improbable. readjustment efforts already underway. These in- Two additional aspects of the IDF’s weapons clude tighter financial and risk management, im- requirements will affect Israeli procurement. First, proved efficiency and productivity, more conserva- the impact of resource constraints, and second, the tive corporate R&D policies, continued emphasis on strong emphasis on operational autonomy and a exports, specialization in specific market niches, and 92 ● Global Arms Trade diversification into civilian product lines. For most Figure 5-2—lsraeli Defense Exports and Israeli defense firms, decreasing the share of military Backlog Orders, 1986-89 business in their overall activity will be critical to 190 long-term survival. Israeli aerospace manufacturers T ■ 180 (e.g., IAI and Elbit), who have long maintained a t / presence in the civilian market, are finding the 170 Backlog orders transition to civilian products easier to make, despite t / 160 the formidable political barriers to Israeli participa- t / tion in collaborative (especially European), nonde- 150 Index t / fense, projects. Elbit has already attained a 50:50 140 civilian to military sales ratio (up from a 30:70 ratio t / several years ago), while the much larger IAI is struggling to increase civilian sales from 12 to 20 percent of its business.

Other Israeli defense firms, especially those in loo military electronics, are finding it more difficult to 1986 1987 1988 1989 make the transition, but they are also less pressed to Year do so. Indigenous R&D and production capability in SOURCE: Economic Advisor to Israeli Ministry of Defense. their area is considered essential not only for Israel’s security but also for the country’s long-term indus- a more competitive spirit, as well as greater financial trial growth. Moreover, demand for their products is and operational autonomy. A change in the status of unlikely to fall. Still, rising R&D costs and risks IMI from direct MOD ownership to government- associated with the global arms market enhance the owned corporation (similar to IAI) has long been importance of economies of scale. Consequently, expected, and only delayed by last minute technical even Israeli companies in defense electronics are problems. Rafael may well follow suit before long. experiencing growing pressures to consolidate their operations. Elbit’s much-publicized negotiations for Ultimately, however, the future of the entire Tadiran’s electro-optics subsidiary E1-Op is a case in Israeli defense industry hinges on specialization and point. Such transactions, however, have proven joint ventures. Specialization in market niches such difficult to make in the heavily unionized parts of as missiles, defense electronics, unmanned aerial Israel’s economy, as the abortive merger of Elisra vehicles, and upgrade and retrofit work is necessary and Tadiran’s Systems Division has clearly demon- to capitalize on the industry’s strength without strated. taxing its resources. The industry will have to Israeli firms in the traditional and specialized concentrate on these areas in order to meet the military areas such as armor casting (Urdan), mortar, country’s security requirements, as well as to take artillery, and ammunition production (Soltam and advantage of its exceptionally skilled engineering IMI), and military R&D (Rafael) face the most capability, the extensive combat experience of the daunting challenges. They experience far more IDF, and the intimate relationship in Israel between difficulty in making the transition to civilian prod- weapons designers and users. On the other hand, the ucts. For them, selling out, scaling back operations, industry will have to forego activity in many other or, in extreme circumstances, even closing down areas, especially those that are highly capital inten- parts or all of their military production lines may sive and therefore certain to strain Israel’s limited well be the only way to go. financial resources. Furthermore, in the future, the Israeli defense industry will have to stay clear of Privatization of the key state-owned defense products whose clear political identification with companies is unlikely given the combination of Israel renders their foreign sale impossible. secrecy requirements and the unattractiveness of defense business in the current market conditions. In Joint ventures are increasingly common in the these cases, changes in the legal status of certain contemporary global arms market. Until recently, parts of the state-owned arms industry may lead to however, Israeli defense firms have taken part in Chapter 5--lsrael’s Defense Industry: Evolution and Prospects ● 93 only a handful of such business ventures. Joint competitive edge tied to combat experience. Be- ventures between Israeli and European companies cause few Israeli systems were deployed in the are rare and will, in all likelihood, remain uncom- Persian Gulf War, their effectiveness in combat mon in the foreseeable future. But joint ventures in could not be evaluated. At the same time, many the defense field between Israeli and American firms American, British, and French systems were tested are growing in number and importance. For Israeli in the war and, consequently, might be further companies they have proven essential in order to refined. The enhanced appeal of these foreign penetrate the U.S. arms market, and in some cases to weapons deployed in the 1991 war is likely to make acquire technology as well. Their principal appeal marketing of Israeli-made weapons more difficult in for American companies, on the other hand, seems the future. This constitutes a significant setback in to lie in their potential for enhancing market clout an era of declining defense procurement budgets through access to off-the-shelf products, specialized worldwide. Israeli military technology, and invaluable IDF operational and combat experience, although this EVOLUTION OF ISRAEL’S last factor will become less important in view of DEFENSE INDUSTRIES U.S. experience in the Persian Gulf War. The cooperation between Mazlat and AAI (mini-RPVs), From 1948 to 1967 Tadiran and General Dynamics Electronic Systems (SINCGARS), Rafael and Martin Marietta (air-to- The roots of the Israeli defense industry predate ground missiles and reactive armor), IAI and Lock- the founding of the state, with the “Haganah” heed (advanced tactical ballistic missiles or ATBMs) weapons producing facilities of the early 1940s. as well as TRW (UAVs) are just a few examples. These underground facilities gained legal status in 1948 and formed the nucleus of Israel’s modern day Finally, a word regarding the impact of the Gulf defense industries. After Israel gained independ- crisis and war on the Israeli defense industry. It has ence, and well into the 1950s, its frost Prime Minister led to a significant short-term increase in the local and Minister of Defense David Ben-Gurion was component of the defense budget as well as in the instrumental in creating the infrastructure for the foreign military aid to Israel from both the United expansion of these facilities and the creation of new States and Germany. These funds have aided several defense industries. existing procurement programs and the addition of several new ones. Moreover, some of the lessons In his budget message to the Knesset in August learned about key weapons systems in the course of 1949, Ben-Gurion spoke of the need to promote Operation Desert Storm are also likely to trigger new domestic production of weapons to avoid depend- orders of both indigenous and foreign weapons. The ence on outside sources. During the early 1950s, appeal of several Israeli systems already under regional and international conditions contributed to evaluation by the U.S. military (e.g., UAVs and a growing sense of the imperative to expand Israel’s mine clearing equipment) might be enhanced in defense industries, and the Tripartite Agreement view of the lessons likely to be learned from played a central role in this respect. Ben-Gurion Operation Desert Storm. faced opposition to the idea of an indigenous defense industry, which was based on economic considera- Yet, side by side with these largely positive tions. By 1953 Ben-Gurion made a number of key developments for the Israeli defense industry, sev- decisions that pushed Israel toward greater self- eral adverse consequences are also anticipated. reliance in the area of weapons production: These include an inevitable medium-term decline in the local defense budget now that the Iraqi threat to The expansion of TAAS (Israel Military Indus- Israel has diminished considerably, at least for try), principally a light arms and ammunition several years. The defense budget is also likely to be the target of growing demands for resources from Reorganization of R&D component of the IDF other parts of the economy, particularly those and Defense Ministry. Ben-Gurion removed associated with absorption of massive immigration the Science Corps from the IDF and placed it to Israel. But the most important setback to the (greatly expanded and modified) under the Israeli defense industry will come from the loss of its jurisdiction of the Defense Ministry, as Emet. 94 ● Global Arms Trade

This research and plarming division later evolved From 1967 to 1984 into Rafael. A major push forward in the direction of autono- ● Approval of the establishment of an airplane maintenance plant, Bedek, which later became mous weapons and aerospace industries came with the Israel Aircraft Industries (IAI). the gradual deterioration of French-Israeli relations in the early to mid- 1960s and finally the French ● Approval of Defense Ministry’s creation of weapons embargo in 1967 and 1968. The French Tadiran, the Israeli Electronics Industry. embargo came at a time when Israel had attained a development capability which could be carried over The establishment of Bedek and Tadiran and the into production. In response to the French decision expansion of IMI in the early 1950s occurred to halt the delivery of 50 Mirage V fighter airplanes, without either significant foreign sources of capital Israel decided to proceed with the development and or technological cooperation between Israel and any production of the Kfir jet fighter. Similarly, when developed industrial nation. The expansion of these five already-paid-for Sa’ar missile boats were pre- industries and the establishment of new industries, vented from leaving Cherbourg in France (although however, were facilitated by West German repara- they were later brought to Israel in a special tions, as well as by Israel’s collaboration with France undercover mission), Israel recognized the need to in coproducing weapons and technology, which build its own missile boat, and decided to build the began in 1956. Reshef class fast attack crafts Sa’ar 4 and 4.5.

Between 1956 and 1967 the IAI increased the The British Government’s decision in 1969 to maintenance and repair service that characterized its cancel an almost completely negotiated agreement early years and also began development of the for the supply of British Chieftain tanks, and U.S. Gabriel sea-to-sea missile. In 1957 IAI decided to refusa1 to supply Israel with modern M-60 tanks produce the first jet training plane, the Fouga prompted the decision to build the Merkava, de- Magister, under license from France. Tadiran and signed for the IDF by General Israel Tal, with crew IAI also began development of communications and safety a paramount concern (development and pro- control systems for the IDF, as the existing systems duction plans became operational only after 1973). were found to be deificient following the 1956 war. However, all engines were either exported to Israel Along with IAI and IMI, Rafael developed a series principally from the United States reproduced locally of air-to-air missiles (Shafrir), a meteorological under license. rocket (Shavit II), and the Luz air-to-ground missile series. The systems developed were tailored to Israel’s defense industry was initially concerned Israel’s needs and contributed to reducing depend- with more modest undertakings such as mainte- ence on external powers. nance, repair, upgrades, modfifications, and licensed production. But after 1967, on the basis of experi- There was constant tension, which began in the ence gained in these areas, Israel initiated indige- 1950s and increased during the 1960s, between the nous design of major weapons. The principal indus- MOD and the IDF in arms production. While the tries as well as many smaller companies initiated IDF preferred to purchase foreign weapon systems new projects and expanded production of weapon that were less expensive, tested and proven, and had systems. a shorter delivery schedule, the MOD maintained that Israel had to pay the price for arms independ- Israel increased investments in R&D funds by 300 ence. This same controversy was reflected within the percent between 1967 and 1972, and the number of government itself: the tendency within Ben- employees in the defense sector almost doubled. Gurion’s political camp, Rafi, was to advocate After 1973, the defense industries continued to expanding domestic industries, while members of a expand production, and began to export arms at a competing faction, Mapai, favored greater reliance profit. Israel became a major supplier of military on foreign purchases. Nevertheless, the defense electronics and communications equipment and industries became firmly entrenched during these advances in missile technology, which included years. IAI’s Gabriel Mark III antiship missile and a number Chapter 5--lsrael’s Defense Industry: Evolution and Prospects ● 95 of air-to-air missiles, placed its electronics industries its orders from its own industry and reduce R&D in at the forefront of the field. order to keep within the defense budget. During this period Israel and the United States THE CURRENT STRUCTURE increasingly cooperated in producing technologi- cally advanced weapon systems. Following the 1973 OF THE INDUSTRY War, Israel became aware of the growing importance The relationship between the defense industries of sophisticated weapon systems, yet the high cost, and the Ministry of Defense is historically close, and complexity, and rapid rate of technological change the four largest firms today—IAI, IMI, Rafael, and in these systems made it difficult to develop and MASHA (Renovation and Maintenance Centers- produce all systems locally. Cooperation with the IDF)-are still closely tied to the Israeli Govern- United States in this area was formalized in a ment. Nevertheless, there are nuances of ownership number of Memoranda of Agreement. The frost within these government-owned firms, and today’s significant defense production MOA was signed in Israeli defense industries also include public and 1979. It enabled Israeli firms to participate in U.S. private sector corporations. What follows is a Government contract bidding without the hindrance breakdown of the defense industries according to of Buy American legislation; this MOA also pro- ownership, as well as a brief profile of some of the vided for cooperation in military R&D. larger industries. While the foundations of an indigenous defense industry were laid during the 1948 to 1967 period, Inhouse Military Organizations the years until the mid-1980s were characterized by MASHA-the Renovation and Maintenance Cen- expansion and increased production in the defense ters within the IDF Logistics Branch—is a prime industries, which has helped Israel realize partial example of military defense industrial production. independence in this field; this includes the ability to One of these Centers has specialized since the 1950s produce those weapons most susceptible to embar- in renovation of armored combat vehicles (World goes and boycotts, the ability to incorporate incre- War II halftracks and Sherman tanks). The manufac- mental technological innovations in large-scale ture of the Merkava was assigned to units within this weapons systems, and the ability to produce weap- Center, and since 1978 MASHA has concentrated on ons designed particularly for local requirements. production of the Merkava main battle tank. While manufacture of most of the tank’s parts was subcon- 1985 to Present tracted, MASHA is in charge of the assembly. This period is perhaps best characterized as the Ministry of Defense Companies defense industry’s retrenchment and restructuring. The most salient aspect has been the cancellation, or This category includes those companies under the cutback of several indigenous R&D and production direct jurisdiction of the Defense Ministry. Today, programs for major combat platforms. These include the only company left with this standing is Rafael, as cancellation of the financially overambitious Lavi IMI had its status changed in late 1990. Rafael is jet fighter project by IAI in 1987, cutbacks in Israel’s weapons development authority, whose production of the Merkava tank, cancellation of traditional task has been to develop state-of-the-art local production of missile boats and submarines, weapon systems. Rafael develops and manufactures and termination of development of an indigenously missiles, guided and unguided weaponry, electronic designed 155mm self-propelled howitzer, Sholef. warfare equipment, C31 systems, simulators, thermal imaging devices, and add-on armor for main battle The state of the industry during this period is best tanks and armored personnel carriers. Rafael has reflected in a statement made in June 1987 by then developed over 100 different weapon systems for the Israeli Defense Minister Yitzhak Rabin, who warned IDF since 1967. the defense industries that the days of indigenous production were over; they would have to reduce Rafael has been among the companies hardest hit their size, develop new markets for export of by lowered defense budgets in the 1980s. Rafael has domestic production, and become more efficient. As traditionally turned over production of its products for the Ministry of Defense, it would have to reduce to IMI and IAI, but in the 1980s Rafael was 96 ● Global Arms Trade increasingly forced into production, exports, and to a marked decrease in foreign orders due to the fact a lesser degree a search for civilian markets in order that other countries have entered its market. The to sustain its workforce. With a highly so- MOD spokesman in early 1989 confirmed that be- phisticated and highly paid workforce, Rafael has tween 1986 and 1988 IMI’s revenues were cut as a found the transition difficult. The company’s cumu- cumulative result of three factors: the rise in cost of lative losses until 1988 were $150 million, and in local material (in dollars), the reduction of MOD 1989 alone its losses rose by $85 million. orders, and the slump in international markets, which caused a reduction in export demand, produc- As a consequence, Rafael cut its workforce from tion over capacity, and lowered prices. 7,500 to 6,000 and experienced severe union prob- lems as a result of these layoffs. The State Comptrol- In February 1991, IMI formulated a plan for ler’s Report of July 1990 found that Rafael was not additional personnel cutbacks of approximately measuring up as a viable business enterprise, having 1,000 employees over the next few months (roughly failed to formulate and implement a long-term 9 percent of the total workforce), due to the rehabilitation strategy. Domestic sales for 1990 continuous decline in activity and the slump in stand at $265 million, defense exports were $110 exports. While exports for 1990 reached $450 million, and commercial sales were $5 million. million, the expected amount for 1991 is a mere Rafael’s current order backlog is $450 million. Projections for 1994 place domestic sales at $290 $300 millon, a decrease of 33 percent. IMI will most likely record losses for 1991. million, defense exports at $210 million, and com- mercial sales at $50 million. In mid-March 1991, Israel’s largest corporate employer, IAI, was Rafael’s General Manager Moshe Peled claimed that established as Bedek Aviation in the early 1950s to in order to remain competitive, Rafael will require maintain Israel’s Air Force aircraft, but gradually yearly sales of $550 million. Moreover, in light of evolved into a full-fledged aerospace industry. An the company’s difficulties, he added that if Rafael important milestone was the licensed production of does not succeed in laying off an additional 800 the French Fouga Magister jet trainer in the late employees, it will face a difficult future. 1950s and early 1960s, which provided it with Government-owned Corporations essential production experience, setting the stage for an autonomous aircraft design and production capa- This category includes firms such as IMI, IAI, bility. Today IMI concentrates on aerospace, elec- Israel Shipyards Ltd., and Bet Shemesh Engines Ltd. tronics, and naval systems, and is comprised of over a dozen separate plants, including the Engineering IMI is Israel’s most veteran defense industry, with Division, Aircraft Production Division, Elta, MBT, its roots in the prestate years. Its mission is to keep and Bedek Aviation. the IDF as independent as possible of external weapons supply sources. It manufactures light arms, Cancellation of the Lavi and earlier defense ammunition, tank guns, military bridging equip- budget cuts resulted in major cutbacks at IAI in the ment, air fuel tanks, artillery rockets and launchers, second half of the 1980s. The total workforce was chaff/flare and aerial decoys, and other materiel. reduced from 22,500 employees in 1986 to 17,500 in Among the weapons produced are the Uzi machine mid-1988 (3,300 as a direct result of the Lavi), and gun and the Galil rifle. Because of the nature of IMI by early 1989 the workforce was further reduced to production (emphasis on ammunition and light 16,000 employees. Yet despite the difficulties, IAI arms), the company has been extremely sensitive to has been relatively sound financially, primarily due regional conflicts and wars, with production peaks during periods of war. to foreign military export opportunities and the transition to space-oriented and civilian markets, The crisis that hit the Israeli defense industries in which currently account for roughly 15 percent of its the mid- 1980s led to a reduction of IMI’s workforce business. IAI hopes to raise this to 20 percent by from the February 1985 peak of 14,615 employees, 1995. In the wake of the Lavi cancellation, IAI to 11,500 in late 1990. From 1986 to 1989, IMI continues to be active in the new combat aircraft suffered losses in the range of millions of dollars— business; moreover, the company turned its efforts $100 million in 1988 alone. It has also suffered from to modernization and upgrade, unmanned aerial Chapter 5--lsrael's Defense Industry: Evolution and Prospects ● 97 vehicles, and continued development of electronics help the company expand its capacity to produce the and avionics, missiles, and space technology. PW 1120 engines. In January 1985, Pratt&Whitney acquired 40 percent control of the company (58 Total sales for 1990 reached $1.6 billion, with percent remained in the hands of the MOD, and 2 exports of $1.4 billion. Orders for 1991 stand at $3 percent was owned by the late French industrialist J. billion, and a projected 80 percent of total sales are Shidlovsky), but Bet Shemesh Engines still faced expected to be exported. While the IAI seems to be financial difficulties. Senior officials threatened to recuperating well, the company’s program for the resign and place the company in receivership unless development of an executive aircraft, Astra, has unions representing the 1,300 employees agreed to been critical. IAI has been accused of unrealistic a plan to fire 400 to 500 workers. Bet Shemesh’s forecasts concerning the market value of the jet. losses reached $55 million by the end of 1985, and Israel Shipyards Ltd. is Israel’s shipbuilding firm, its cumulative debt reached $65 million in 1987. and it deals in ship construction and repairs (Sa’ar 4 Consequently, in early January 1987 the Israeli and 4.5 missile boats). Israel Shipyards has built Government appointed a receiver to run the com- naval products both for Israel and for export. The pany (an arrangement similar to Chapter 11 in the company faced financial difficulties in the late United States). Following the cancellation of the 1980s, following the termination of all major naval Lavi project, Pratt & Whitney, which originally production contracts, and the absence of new civil- invested $10 million in the company, considered ian construction activity. It nonetheless proceeded to pulling out but ultimately decided to stay in. Since develop the Shaldag attack craft, which it was hoped 1987, Bet Shemesh Engines’ workforce, level of would improve its fortunes. The Israeli Navy, activity, and operating losses have decreased, but the however, refused to buy the Shaldag without even company’s future remains uncertain. testing it and continued to prefer the IAI-produced Super Dvora. In mid-1990, Chief-of-Staff Shomron Public-Sector Corporations promised to appoint a team to test the patrol boat, and in early 1991 it was tested, although the IDF still This group of defense industries highlights a refused to purchase it. The U.S. Coast Guard, unique aspect of the Israeli economy in general: however, is considering buying 50 Shaldags to use these are firms owned by the major trade union, in its war on drugs. Toward the close of the decade Histadrut, and are controlled directly by Koor, the Israel Shipyards’ financial situation stabilized industrial holding company owned by Histadrut. thanks to extensive cost-cutting measures, as well as Here one finds Soltam, Tadiran, and Telkoor. an infusion of much maintenance and overhaul work Soltarn is a weapons and ammunitions factory (including work for the U.S. Navy 6th Fleet). specializing in mortars and artillery weapons. A Bet Shemesh Engines, devoted to developing, recent agreement between its two principal share- manufacturing, and repairing jet engines, originally holders, the Zeldowitz family (which held 26 manufactured and assembled Marbore VI turbojets percent of the company’s stocks) and Koor, has for the Israeli Air Force’s Tzukit version of the resulted in the transfer of Soltarn to full Koor French-made Fouga Magister trainer, and later ownership. Soltam is one of the companies that manufactured portions of the General Electric J79 suffered from the smaller defense budgets in the engine-power, which powers the Israeli Kfir fighter. second half of the previous decade. Soltam had its Bet Shemesh Engines is currently owned 58 percent best year in 1978 with exports of mortars, artillery by the Government, 40 percent by United Technolo- weapons, and shells reaching $94 million (mainly to gies, and 2 percent by the Education Fund. Between the Shah of Iran). Khomeini’s rise to power reduced 1985 and 1987 the company had problems with Pratt demand from the world market and increased & Whitney over the licensed-production of the PW competition created difficulties for the company, 1120 engine destined for the now-defunct Lavi jet and while in the early 1980s it recovered somewhat, fighter project. since 1984 there has been a drastic decrease in sales. In the early 1980s, Bet Shemesh suffered heavy In 1987, Soltam’s deficits increased due to a losses and the board of directors claimed that the change in the IDF procurement policy. In an attempt government was not investing the promised funds to to save the company massive cutbacks were pro- 98 ● Global Arms Trade

posed, which led to severe tensions between man- traditionally the ratio of defense exports to sales to agement and the nearly 2,400 workers. These labor the Ministry of Defense stood at 50:50, projections disputes reached a peak in August 1987, and since for 1991 show that $200 million will be directed to then 1,800 employees have been fired. The most export and only $120 million will be sold to the IDF, recent labor dispute broke out in late July 1990 about a 60:40 split. following plans to fire a further 180 employees from Another variant of the public sector corporations the remaining 580. Nevertheless, in late 1990 are those run by a kibbutz, a collective settlement; an Soltam had orders of $30 million, a large portion of example of this type of corporation is the Nezer- which were already in the factory’s stock, and this Sereni Metal Works, which produces vehicle chas- growth in orders may help the company reach sis. operational balance.

Tadiran, traditionally Israel’s largest producer of Private-Sector Corporations electronics, specializes in both civilian and military communications equipment. Tadiran deals in three This category includes privately owned firms that areas of military production: communications, elec- produce military materiel for the defense establish- tronic warfare systems for the Air Force, Navy, and ment. Examples include Elbit, Urdan, E1-Op, and Intelligence Corps that are developed and produced Rada. Funding for private sector corporations often in Tadiran’s subsidiary Elisra, and electro-optical comes from the Israeli and American stock market systems produced through El-Op. The civilian sector as well as from the large banks. Some of these firms of Tadiran is comprised mainly of consumer elec- are owned by Klal-an industrial conglomerate tronics and telecommunications. As a result of owned by Israeli banks (more than half of Urdan’s defense budget cuts, Tadiran’s defense section has stock, for example, is owned by Klal). been losing money, while the civilian sector—which Elbit is Israel’s largest computer systems house comprises more than 50 percent of total activity-is and exporter of computer-based products and sys- registering hefty profits. tems; its shares are traded on the Tel Aviv Stock In the mid-1980s, Tadiran experienced financial Exchange and over-the-counter in the United States. difficulties in its defense sector due to a slowdown Elbit deals in airborne, ground, and naval systems, in its traditional export market, and cutbacks in and advanced battlefield systems. For example, an orders from the Israeli Signal Corps. In 1988, innovative sensor for the detection of chemical war- Tadiran in conjunction with General Dynamics fare material produced by Elbit was used for the first Electronics Division was selected to supply Single time during the Persian Gulf War. Elbit also de- Channel Ground and Airborne Radio System velops, manufactures, and markets a variety of civil- (SINCGARS) equipment to the U.S. Army. The ian systems and products ranging from imaging radi- selection nonetheless entailed complications for ometer systems to computer products and services. Tadiran, as the company was required to make heavy Elbit is one of the few defense companies not to outlays both in preparation for production in the have had a crisis in the mid- 1980s, mainly due to its United States and in anticipation of future contracts. high proportion of civilian sales. Elbit formulated Other Tadiran military projects include battle man- three strategic goals: acquisition of companies that agement simulators, work on Strategic Defense complement Elbit’s activity in the military sector, Initiative projects, and ground stations for UAVs. such as the proposed takeover of E1-Op, joint Data on Tadiran from 1986 and 1991 show that ventures with American and European companies, the workforce has been cut from 13,000 to 6,500. and investments in the civilian sector. Elbit’s 1990 Total sales registered for 1986 were $620 million, takeover of 70 percent of the stock of Elscint, a while projections for 1991 reach $700 million. The producer of medical equipment, was a major step in division between defense and civilian sales shows the direction of greater civilian production. that while in 1986 more was directed to the defense Data from the past 3 years illustrate Elbit’s market ($360 million v. $260 million), in 1991 financial soundness. Total revenues for 1988 were expectations are that $380 million will be civilian $158 million with a backlog of orders of $316 and only $320 million defense-oriented. While million; sales outside Israel came to $98 million and Chapter 5--Israel’s Defense Industry: Evolution and Prospects ● 99

domestic sales reached $60 million. Elbit recorded over $82 million went to export and $40 million WaS a record-high profit of $22 million for 1990, as local. compared to $13 million in 1989; moreover, Elbit’s income from the civilian market made up 57 percent Rada focuses on air force ground support equip- of the company’s total income (as compared to 23 ment, avionics, computers constructed to military percent in 1989). Elbit derived 45 percent of its 1990 specifications, automatic test equipment, and com- revenues from Elscint, and over 80 percent of the puterized control systems. Rada is one of the few revenues came from export and international sales. industries to gain from the worldwide defense Elbit is currently taking steps to further strengthen budget cuts, as it produces test and maintenance its position in the U.S. market. equipment; Rada participates in avionics upgrades in most of the avionics industries in the world. Urdan, comprised of several autonomous opera- Another private defense industry that has recently tions, produces items principally in metal and steel: been successful is Eagle Military Gear Overseas. armored steel castings, tank and armored vehicles This company produces and markets different types suspension parts, tank upgrading kits, mine clearing of armored vests, battle vests for infantry units, systems, ammunition trailers, and various spare armored corps, demolition squads, medical corps, parts. Urdan suffered heavy losses in the past 4 naval commandos, etc., nuclear biological and years, about $7.5 million in 1990 alone; a large chemical warfare (NBC) equipment, and various portion of the losses are related to the shutdown of accessories. For the 6 months preceding November its American subsidiary Lebanon Steel Corp. in 1990, Eagle recorded earnings of just under $1 September 1990. Moreover, Urdan sells mainly to million, as opposed to losses of roughly $1 million the Israeli MOD and the U.S. Army, but the MOD for the 14-month period ending on May 31, 1990. has not committed itself beyond April 1992 and Eagle presently has orders that reach roughly $80 hasn’t specified a minimum of Merkava tanks that it million and has more than 500 employees in its 1 will buy from Urdan. Long-term sales contracts with U.S. and 2 Israeli plants. Following the Gulf War, the U.S. Army end in late 1991, and additional there has been increased interest in Eagle’s NBC contracts are uncertain at this point. The chassis that protective gear in both the United States and Israel. Urdan produced for the Patriot missile were sold at what turned out to be a significant loss; while a Thus, the largest Israeli defense firms (IAI, IMI, technical success, it was a financial failure. and Rafael) are still closely tied to the government. The privately owned defense industries are much Urdan, one of the defense industries most in need smaller, although they are relatively successful of a transition to civilian markets, has few resources despite the constraints and competition posed by the with which to do so. Urdan will undoubtedly find it larger state-owned companies. difficult both to expand its clientele for existing products and to find the resources to develop The past 5 years have been characterized by products with which to enter new civilian markets. defense budget cuts and a decrease in MOD orders from local defense industries, which have resulted in E1-Op, half owned by Tadiran, specializes in serious economic difficulties for most of these optical products, night vision technology, and laser companies. While 5 years ago the defense firms technology (including tank fire control systems, together employed a total of 60,000, today less than thermal imaging and image intensification sights 45,000 remain. These difficulties have pushed the and systems, aerial and marine systems, and sights defense industries toward increased exports and and optomechanical products). One of the smaller redirection of production to the civilian market. Not defense firms, with a total of 952 employees as of all industries have been able to deal with the early 1991, E1-Op’s sales from 1986 to 1990 have transition successfully, and in addition to personnel been on the rise, from a recorded $83 million in 1986 cutbacks, a number of plants have been forced to to $129 million in 1990. The proportion of export shut down. Paradoxically, those companies that versus local sales has changed quite significantly needed most to shift to civilian and export markets over the past 5 years: while in 1986$37 million was are also those with the fewest resources with which directed to export and $47 million was local, in 1990 to do so--for example, Soltam and Urdan. 100 ● Global Arms Trade

Other companies, such as IAI and Elbit, have extremely high degree of self-sufficiency in certain found the transition much easier. In spite of the key areas of military procurement. difficulties, on the whole the defense industries have Most products of the Israeli defense industry adapted themselves to changing realities. Export originally developed for domestic consumption are figures, for example, show that while in 1984, 70 also sold abroad, the two principle exceptions being percent of defense industry products were sold to the Merkava tanks (as distinguished from certain tank IDF and only 30 percent directed to export, toward components) for which there have been no foreign the close of the decade the situation was reversed. buyers, and certain sensitive systems that are often DOMESTIC AND FOREIGN SALES exported in somewhat downgraded versions. An important export item of the industry has been the Domestic arms requirements provided the origi- Gabriel surface-to-surface missile, several models of nal rationale for development of an indigenous de- which have been sold abroad. Other Israeli devel- fense industry in Israel. Consequently, the industry’s oped products that have met with significant export products and output have traditionally been oriented success include several types of missiles, sophisti- toward the IDF. Senior IDF officials have been re- cated tank and artillery ammunition, fire control, luctant to rely on domestic procurement, especially radio communication, and electronic warfare sys- for those products that could be obtained elsewhere tems, mini-remotely piloted vehicles (RPVs), and either sooner or with more certainty regarding per- light arms (see table 5-4). formance and ultimate cost. But their reluctance was frequently overruled by a powerful combination of The most important foreign markets for the Israeli high-level political support for the development of defense industry have traditionally been in Latin an indigenous defense industry, and foreign restric- America and Southeast Asia. They were partially tions on arms sales to Israel. Furthermore, over time displaced by Iran (under the Shah), South Africa, some of the military’s opposition to domestic and certain West European customers in the 1970s procurement has also dissipated, due to several and early 1980s. This pattern changed course again impressive indigenous weapons developments. in the 1980s with the loss of the Iranian market (in the early 1980s), the imposition of a ban on new Thus, after a modest beginning in the 1950s, the arms sales to South Africa (since 1987), and the industry has increasingly become the most impor- tightening defense cooperation between Israel and tant source of defense products and services for the the United States. Consequently, in the latter part of IDF. Early on, the indigenous industry assumed the 1980s the United States emerged as the single most maintenance and retrofit services for the IDF most important foreign customer of the Israeli and embarked on the domestic production of ammu- defense industry. nition, light arms, and automotive parts as well. These were initially supplemented with World War THE U.S. CONNECTION II British and Korean War-era U.S. surpluses as well The relationship between the Israeli and U.S. as new French materiel. Gradually, the Israeli defense industries in the 1980s (especially the latter industry also made inroads into additional and more half of the decade) was characterized by increased sophisticated areas. It has embarked on licensed cooperation on common projects (U.S. firms teamed production and ultimately development as well, for with Israeli firms or used them as subcontractors) the IDF, of communications gear, electronic war- and by growing defense exports from Israel to the fare, radars, avionics, missiles and rockets, as well as United States. Since February 1987, Israel has been self-propelled artillery, mortars, tanks, jet trainers permitted to compete for Pentagon contracts as a and fighters, and naval craft. Its products have major U.S. non-NATO ally; moreover, Israeli com- entered the IDF ranks in increasing numbers in the panies have entered the American market also 1970s and 1980s, side by side with new U.S.-made through direct contacts with branches of the U.S. arms that began to flow to Israel in the mid-1960s. Armed Forces. As a result of the development of the indigenous defense industry and the severance of defense ties Israel has benefited from the dollars or barter with France, Israel attained in the post-1967 era an products obtained in return for defense exports, as Chapter 5--Israel’s Defense Industry: Evolution and Prospects .101

Table 5-4-Selected Arms Orders, Deliveries and Licensed Production of Israeli Weapon Systems, 1986-88

Arms transfers from Israel Number Weapon Year Year Recipient ordered name Type ordered delivered Number -,. ------United States ...... 37 Kfir-C1 Fignter 1984-86 1985-87 25 Popeye Antiship missile 1986 1987 6 12 Have Nap Antitank guided missile 1986-88 1987-88 14 Argentina ...... 1 B-707-320C Transport 1985 1987 1 120 Shafir Air-to-air missile 1986 1988 60 Chile ...... 13 Kfir-C7 Fighter 1988 30 M-4 Sherman Main battle tank 1987 1987 30 Colombia ...... 14 Kfir-C2 Fighter 1981 Ecuador ...... 12 Kfir-C7 Fighter 1986 1986-87 12 2 Barak launcher Ship-to-air missile Iauncher 1984 16 Barak Ship-to-air/surface-to-air/ 1984 point defense missile 96 Shafrir-2 Air-to-air missile 1986 1987 96 Paraguay ...... IA1-201 Arava Transport 1985 Lebanon ...... 36 BTR-60P Armored personnel carrier 1987 1987 18 18 M-1944 100mm Towed gun 1987 1987 18 18 T-54 Main battle tank 1987 1987 18 Liberia ...... 3 IAI-201 Arava Transport 1984 1985 3 Cameroon ...... 4 IAI-202 Arava Transport 1985 10 Kfir-C7 Fighter 1985 Sri Lanka...... 18 Dvora Class Fast attack craft 1985-87 1987-88 12 China ...... Mapats Portable antitank missile 1986 Thailand ...... 12 Bariel-2 Ship-to-ship missile 1987 1988 12 Fiji ...... 3 IAI-202 Arava Transport 1986 Papua New Guinea ...... 3 IAI-201 Arava Transport 1984 1984 1 1985 2 Licensed production of Israeli weapon systems Number Weapon Year Year Licensee ordered name Type ordered delivered Number United States ...... EL/2106 Point defense radar 1983 Popeye Antiship missile 1987 South Africa...... 96 Gabriel-2 Ship-to-ship/surface-to-ship 1984 1986-88 36 missile 12 Reshef Class Fast attack craft 1974 1978-88 9 Taiwan ...... Gabriel Ship-to-ship/surface-to-ship 1978 1980-88 48 missile launcher Gabriel-2 Ship-to-ship/surface-to-ship 1978 1980-88 375 missile NOTE: Blank spaces denote information not publicly known. SOURCES: Office of Technology Assessment, from data in Stockholm International Peace Research Institute, SIPRI Yearbooks, 1986 through 1989, World Armaments and Disarmament. well as from the closeness of the military relation- Weapons and Infrastructure Development Author- ship (Israel became a major partner in the Strategic ity, a factor that pushed Israel to cooperate was the Defense Initiative). The United States has benefited growing cost and complexity of technologically from Israel’s ability to fill essential technological sophisticated weapons systems, epitomized by can- gaps at short notice, and to provide off-the-shelf cellation of the Lavi fighter. A drawback of Israel’s weapons, as well as from the fact that IDF weapons penetration into the U.S. market is that it is usually systems are battle proven. According to Brig. Gen. in partnership with U.S. companies, with production (ret.) Uzi Eilam, current head of the Israeli MOD’s usually carried out in the United States; thus, while 102 ● Global Arms Trade these projects are lucrative to the Israeli companies, Israel once the bidding process has been completed, they do not necessarily create more jobs in Israel. if an Israeli firm had been identified as the lowest bidder. Israeli sales to the U.S. Defense Department The formal aspect of the U.S.-Israeli cooperation rose significantly under the new MOA, and an in defense production finds expression in a series of independent defense industrial relationship was Memoranda of Agreement and Memoranda of Un- established between the two countries. derstanding signed by the governments of the two countries. These MOAs and MOUs provide the legal A special MOA was signed in May 1986 to authority for U.S.-Israeli cooperation in R&D, for provide a comprehensive basis for participation of Israeli companies’ attempts to secure U.S. defense laboratories, research centers, defense industries, contracts, and for Israeli participation in large-scale and other entities in Israel in SDI research. This defense projects, most notably SDI. The following is MOA was followed by several more, as well as a brief review of the important MOUs and MOAs in actual contracts involving more than $200 million cooperative defense research and production. (programs include the Arrow ballistic missile de- fense system, the Israeli Test Bed, and work on the U.S.-Israeli military technological cooperation architecture of such a system). In February 1987 began in 1971 with an agreement between the two countries for the United States to provide technical Israel was declared a major non-NATO ally, and in December of that year an MOU was signed that information and assistance for arms production; this did not lead to agreements for coproduction. In fact, covered R&D, logistics support, and additional SDI under the Carter Administration, Israel regularly work, and brought Israel’s status on cooperation in line with NATO countries. It generally enabled received compensation for having been denied Israel to compete on an equal footing with U.S. and coproduction agreements. Cooperation with Israel was opposed in Congress because of concern that the NATO companies for U.S. contracts, gave Israel more latitude to sell weapons to the United States, United States might be aiding potential competitors to U.S. industries. The Reagan Administration was and elevated Israel to a trade status previously much less reluctant in this regard, and the most granted to only two other non-NATO allies— significant defense MOAs and MOUs were signed Sweden and Australia. during the Reagan Presidency. Beyond Israel’s participation in SDI, which has The first significant defense MOA between the primarily been between IAI and the Strategic United States and Israel was signed in 1979, during Defense Initiative Organization, Israel’s most inti- the Carter Administration, and may be seen as a mate relationship with the U.S. Armed Services has reward to Israel for having concluded a peace treaty been cooperation on Navy and Marine Corps pro- with Egypt. As mentioned above, this MOA enabled jects. This includes the leasing of two Kfir (F-21) Israeli defense firms to participate in U.S. Govern- squadrons for aggressor squadrons, the sale of ment contract bidding, and also provided for cooper- mini-RPVs and mobile bridging equipment, IMI’s ation in R&D. But, unlike the MOUs signed between Portable Mine Neutralization System (POMINS) II, the United States and NATO countries, the U.S.- and laser range finders for U.S. Marine Corps Israeli MOA was not comprehensive. Only a speci- AH-lW Cobra helicopters (El Op, IAI with fied number of defense items (initially 500) were not Kollsman). Israel’s relationship with the U.S. to be subject to Buy America restrictions. Moreover, Army has also been close, and has consisted of actual implementation of the 1979 MOA was sales of mortars, radio communication (including problematic in terms of the domestic sensitivities to SINCGARS), tank launch bridging equipment, and non-American procurement. a plow bulldozer system for BMY’s Counter Obsta- cle Vehicle. The least amount of cooperation has In early 1984, this MOA on security matters was been with the U.S. Air Force. To date it includes only renewed and expanded. It aimed to facilitate Israeli the Have-Nap (AGM 132) air-to-ground missile deal military exports to the United States, allowed for with the Strategic Air Command (Rafael with Martin freer Israeli access to the U.S. market by increasing Marietta), although the Tactical Air Command is the number of categories open for Israeli bids, and also currently evaluating the procurement of the prevented U.S. officials from vetoing deals with same missile. Chapter S-Israel’s Defense Industry: Evolution and Prospects . 103

Recent cooperation between U.S. and Israeli Finally, IAI, in a joint venture with TRW, is con- defense firms includes a $200 million contract for ducting test flights of the future unmanned aerial IAI to improve F-5 jets produced by Northrop, the vehicle (UAV) that it wants to sell to all branches of Adams Mobile Defense System jointly produced by the U.S. military. Following the successful employ- General Dynamics and Rafael, and data-transfer ment of IAI’s Pioneer UAV in the Gulf War aboard equipment for F-16 jets that Rada Electronics U.S. Navy battleships, procurement of additional Industries produced for General Dynamics. The U.S. Pioneer mini-RPVs is being seriously evaluated by Congress recently awarded $53 million for the the U.S. Navy. continued development and purchase of IAI laser systems for U.S. Marine Corps’ super-Cobra heli- Thus, the main features of the cooperation be- copter (for 1991). A subsidiary of Eagle in the tween U.S. and Israeli defense industries are the United States has received an order for protective following: coveralls and tents (against nuclear biological and 1. Outright procurement from Israeli defense in- chemical warfare) for $14 million. dustries has risen over the years; yet in most Elbit has received a $10 million order from cases it is done in collaboration with U.S. General Dynamics for the supply of avionics sys- companies, with the actual production carried tems until 1992; this deal was concluded as part of out in the United States. General Dynamics’ commitment to offsets in Israel 2. A significant amount of activity has resulted in the framework of the agreement to supply F-16s either from direct or indirect offset agreements to the Israeli Air Force. Rafael and Martin Marietta incorporated in the major IDF contracts with are jointly contenders for a large contract for reactive U.S. companies. armor for the new Bradley Armored Fighting 3. To date there have been relatively few joint Vehicles. If Rafael and Martin Marietta win, 50 ventures in R&D, although there are early signs percent of production will be carried out in Israel. that joint activity in this realm is on the rise.