Defense cos rivalry threatens lucrative exports to Colombia

The potential loss to Israel from the IAI-Elbit Systems rivalry and the lack of cooperation between Israeli defense companies approaches $1 billion.

Initiatives by Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) and Elbit Systems Ltd. (Nasdaq: ESLT; TASE:ESLT) to cut the price of their tender offers for Unmanned Aerial Vehicles (UAVs) and their threats to take legal action resulted in diplomatic tensions between Israel and Colombia while the two companies came away empty handed.

The real reason for Ministry of Defense director general Udi Shani's visit to Bogota in late October was to ensure the future of Israeli defense exports to Colombia, which is one of the most important customers of Israel's military industries.

Israeli defense exports to Colombia suffered a major blow last year after a bitter rivalry between IAI and Elbit Systems over the sale of UAVs to the Colombian Army. According to "Defense News", the potential loss to the Israeli economy because of this rivalry and because of the general lack of cooperation between Israeli defense companies approaches $1 billion.

In a statement on October 24, the IDF spokesman said that Shani's visit to Colombia was "the first of its kind". It added that the visit was intended "to deepen the strategic-defense and industrial relations between the countries and the defense establishment, with an emphasis on policies that the Ministry of Defense is leading on all matters related to defense exports. This visit laid the guidelines for continuing successful collaboration between the two countries."

The October visit was Shani's second visit to Bogota in an effort to repair the damage caused by the rivalry in the UAV contract. Channel 2 News reported on March 11 that Shani was in Bogota in early March in an effort to save the deal. Channel 2 said that the Ministry of Defense was investigating "serious suspicions" that an executive from Israel's defense industry sought to shoot down a $50 million deal signed between an Israeli competitor and Colombia. Before the contract was signed, anonymous letters were sent to several Colombian newspapers alleging that Elbit Systems, which won the tender, bribed Colombian government leaders.

Channel 2 News added that the Colombian media reported the story, resulting in the Colombian government suspending the contract.

"Defense News" correspondent Barbara Opall-Rome reports that during his October visit to Bogota, Shani promised Colombian leaders that the Ministry of Defense would put in order Israel's defense companies bidding in Colombian tenders. Shani reportedly added that, if it becomes necessary, the Ministry of Defense would make sure that certain sales would be handled as government-to-government deals, bypassing the harmful competition between Israeli companies.

Ministry of Defense officials told "Defense News" that IAI and Elbit Systems' initiatives to constantly cut their bids in the UAV tender and their threats of legal action caused tensions in Israeli-Colombian relations, resulting in both companies coming away empty handed, when then-Colombia Minister of Defense Juan Manuel Santos, who is now President, cancelled the tender.

"Defense News" says that the potential losses from the episode nears $1 billion: $50 million in lost revenue from the cancelled tender; $100 million in options to sell more UAVs in the future; millions of dollars more in UAV flight training in Colombia, marketing, and legal costs; and more than $700 million in a tender to upgrade Colombia Navy frigates, in which Israeli companies failed to participate in.

Israeli sources said that by the time IAI agreed to establish a consortium with Elbit Systems and Rafael Advanced Defense Systems Ltd. to participate in the Frigate upgrade tender, it was too late, and a French consortium won the tender.

Ministry of Defense officials said that Shani's promises to President Santos during the October visit, together with the ministry's new export policy, would create "adult supervision" over Israel's defense industries, which would help Israel consolidate its position in the expanding Colombian defense market. Potential Colombian defense procurements include Merkava tanks, reconnaissance satellites, plane and helicopter upgrades, marine sensors, and border control systems.

Former Ministry of Finance director general Amos Yaron praised the ministry's decision to set a new defense export policy. "Our defense industries waste too much money competing against each other," he said.

Several years ago, Yaron used his authority to compel IAI and Elbit Systems to collaborate on UAV exports to Turkey, worth $190 million. When squabbles between Israel Military Industries Ltd. (IMI) and Elbit Systems jeopardized the $680 million Turkish Army M-60 tank upgrade program, Yaron ordered IMI to serve as the chief contractor in the project, with Elbit Systems as the subcontractor, and be paid directly from the Ministry of Defense, rather than by IMI or by Turkey.

Published by Globes [online], Israel business news - - on November 8, 2010

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

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