Israel defense cos press for bigger stake in F-35

The Defense Ministry claims to have won a $4 billion commitment for reciprocal procurement.

There are severe strains between the Ministry of Defense and some defense companies over industrial collaboration on the F-35, built by Lockheed Martin Company (NYSE: LMT), due to uncertainty, lack of clarity, lack of confidence, confrontations, and mixed messages. This is, however, the final stages of negotiations, and several Israeli defense companies are trying to use the Ministry of Defense to obtain better commercial terms from Lockheed Martin, the US administration, and the consortium of eight countries that are participating in the F-35 program.

It seems that while the Ministry of Defense issued an official statement about "agreements reached for the inclusion of defense companies in the production of the plane for other customers, and reciprocal procurements of at least $4 billion," from the talks that have been going on for some time between some Israeli companies and Lockheed Martin, there has emerged no certainty about their participation in producing all F-35s of Lockheed Martin, or at least in several hundred or thousand built by the company, even though there is full willingness about procurement in Israel for the 20 F-35s that the Israel Air Force will buy in the coming years.

Lockheed Martin is willing to undertake that in the future if Israeli products are found to be worthy, appropriate, of especially high quality, and at a reasonable price, contracts could be signed to integrate Israeli companies in the production of part or all of the 2,000 F-35s planned to be built in the coming years. Lockheed Martin executives point out to Israeli defense companies that past relations have been excellent for both parties. The executives add that when Israel bought 102 F-16Is for $4.5 billion, Lockheed Martin commited to $1.45 billion in reciprocal procurements over ten years. The actual amount reached at least $2 billion in half that time.

However, for some Israeli defense companies, declarations of intent from Lockheed Martin are not enough, nor are official statements from the Minister of Defense Ehud Barak, or ministry director general Udi Shani, that the agreements refer to all F-35s, and not just those bought by Israel. Some Israeli defense companies will make especially heavy investments to participate in the production of the F-35, and it is not clear whether production for only the 20 planes to be bought by Israel will make a reasonable return on investment, if any.

For example, Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1), which is supposed under the memorandum of understanding to produce a large number of components, including components for the wings, will have to invest in a new infrastructure suited for the new line of wings, procure tools, innovative technologies, train employees, and obtain certification from the US Federal Aviation Administration (FAA). This was made clear to senior Ministry of Defense officials that if the delivery of just 20 planes was at stake, it was doubtful whether it would be worthwhile for IAI to carry out what it is designated to do. So far as is known, IAI has asked to sign a contract for the supply components for at least 200 planes.

Nonetheless, it has been made clear to IAI that the contracting for the production for the planes for Israel only will bring the company into a new era of state-of-the-art technologies in stealth materials, which only a few similar companies possess. The company will also obtain especially certification for very strict standards which will only enhance its activity, and secure its business future, if it meets quality and delivery terms.

Defense sources rejected the claims by the defense companies out of hand. The sources said that the claims were due to "ignorance in the best case, and deception in the worst case". The Ministry of Defense says that it signed, and informed the defense companies about, framework manufacturing cooperation agreements and a commitment, worth at least $4 billion, for the integration of Israeli companies not just for the 20 F-35s designated for the IAF, but for general production of the plane.

The Ministry of Defense said in its official response, "This achievement will enable Israeli companies to participate and enter fields they've never been in before."

Some Israeli defense companies are still trying to get into the club of sub-contractors for Lockheed Martin. Israel Military Industries Ltd. (IMI), for example, wants to participate in the F-35's ordinance, and its subsidiary Ashot Ashkelon Industries Ltd. (TASE: ASHO) wants to produce components. No MOUs have been formulated however.

In contrast, it is already clear that pilot helmets made by Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) will be used in the F-35s; IAI will manufacture components, especially for the wings; Cabiran Company, owned by Kibbutz Cabri, which has a worldwide reputation for its lost-wax castings, will be a chief caster; Elbit Systems unit C4I (formerly Tadiran Communications) will supply power systems for transmitters; Advanced Logistics Development Ltd. (ALD) (TASE: ALD) will supply maintenance software; and SimiGon Ltd. (AIM:SIM) will provide imaging software and simulators for the F-35 program; and other Israeli companies will also take part. In the future, it is possible that Israeli companies will also participate in reciprocal procurements related to the F-35's engines.

Published by Globes [online], Israel business news - - on August 22, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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