Israeli Industry Chiefs Urge Consolidation

Cite Wasteful Overlap at Taxpayer Expense

Dec. 17, 2012 – 02:35PM   |

By BARBARA OPALL-ROME   for Defense News-

TEL AVIV — Despite the infighting and turf battles that typify Israel’s fiercely competitive defense industry, top executives here agree on one thing: The government must ease its grip over a bloated and ultimately unsustainable state-owned defense sector.

Whether through privatization, consolidation or a combination of the two, industry chiefs urged the Israeli government to learn from the past decade of U.S. and European industrial consolidation, in which fewer firms fortified by free market forces now compete more favorably on the global market.

“[The Defense Ministry] can’t shoulder this size of industry. Consolidation is mandatory,” Ilan Biran, chairman of state-owned Rafael, told participants at an annual business conference by Israel’s Globes financial publishing company Dec. 10.

Speaking with counterparts from state-owned Israel Aerospace Industries (IAI), Israel Military Industries (IMI) and privately held, publicly traded Elbit, Biran cited the benefits gained from U.S. and European consolidation.

“In academia, they say it’s publish or perish. In our industry, I say it’s sell or vanish. There’s no room for ego. … It’s better to do 50 percent from a large production order [through cooperation with competing Israeli firms] rather than 100 percent of zero orders,” Biran said.

The Rafael chairman said his firm must invest 7.5 percent of annual turnover in research and development to provide systems such as Israel’s Iron Dome, the Trophy active protection for ground vehicles and other cutting-edge technologies. Consolidating research and development resources into critical technology sectors would strengthen competitiveness, expand production and ultimately preserve Israel’s industrial base, he said.

For more than a decade, Joseph “Yossi” Ackerman, chief executive of Elbit, Israel’s rapidly growing private-sector aerospace and defense firm, has been calling for consolidating local industry into two major companies: Elbit and another firm in which the government retains minority holdings.

Under Ackerman’s plan, Elbit would be permitted to acquire parts of IMI while the unprofitable state-owned firm still offers added value. In parallel, the efficiency to be gained from consolidation and partial privatization of other state-owned firms would encourage Elbit to expand cooperation and joint ventures with its sister Israeli firm.

“Competition costs money… and one needs to ask if [government] stockholders can afford such competition,” Ackerman told the Dec. 10 business gathering.

According to Ackerman’s calculations, redundancies and unnecessary domestic competition cost Israeli firms some 10 percent of annual turnover. Based on the Israeli industry’s annual $7 billion in new contracts in recent years, this translates into $700 million each year.

“It costs the Israeli taxpayer $700 million a year to fund the cost of competition,” Ackerman said. “Wouldn’t it be better to put this money into marketing, research and development and human resources?”

IMI President Avi Felder insisted that his firm can quickly become profitable through a privatization agreement with Treasury that removes the onerous annual burden of having to pay pensions to long-retired employees. At the event, Felder said growing sales continue to erode accumulated debt from prior decades, and that the firm is working with MoD, Treasury and labor unions to conclude a privatization deal “in a short matter of time.”

Others, however, remained skeptical of the government’s ability to push through long-sought privatization plans. Referring to IMI, IAI and Rafael, Biran didn’t bother to hide his sarcasm when he noted, “Three of the four of us live in rented apartments. We can’t sell them; that depends on the owners.”

Dov Baharav, the newly appointed chairman of IAI, said privatization is preferable to consolidation among government-owned companies. He also acknowledged that privatization of Israel’s largest state-owned industry is a low priority for government.

Nevertheless, Baharav said his priority for the coming years is to augment IAI’s value and prepare it for eventual privatization. He noted IAI’s strong performance in the commercial aircraft sector and its growing presence in India and other emerging markets as solid indicators of the firm’s growth potential.

With $3.5 billion in annual sales, some 82 percent of them for export, IAI would continue to leverage high-earning sectors such as its Elta subsidiary, producers of the radars for Israel’s Iron Dome and Arrow active defense systems, Baharav said. “At the end of the day, IAI will be privatized,” he insisted.



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