The Ministry of Defense is due to soon decide whether to procure the T-50 Golden Eagle made by Korean Aerospace Industries Ltd. (KAI) or the twin-engined M-346 jet, made by Italy's Alenia Aermacchi, as the Israel Air Force's (IAF) new jet trainer. IAF pilots have test flown both the T-50 and M-346 and declared them suitable for its training needs, and the time has come to decide.
The new jet trainer will replace IAF's obsolete A4 Skyhawks. When the Ministry of Defense makes its decision, Thor, a joint venture of Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) and Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) will procure 25-35 planes for $1 billion, maintain the planes for the Air Force and sell it flight time on them. Former Air Force Colonel Ilan Harel has been appointed CEO of Thor.
KAI executives have launched an offensive to win the support of Israeli defense officials to gain their confidence in the T-50 in order to clinch the deal. KAI executives have complete confidence in the T-50 and believe that there is no better trainer for the IAF's future combat pilots because of the plane's many similarities with the F-16.
This is no coincidence. KAI's partner in the T-50 is US defense giant Lockheed Martin Company (NYSE: LMT), the manufacturer of the F-16 as well as the F-35 Lightning II, the stealth fighter bomber that the IAF will also operate. KAI is using its Lockheed connection as a selling point to Israel, especially in view of the company's concern that someone at the Ministry of Defense is evading them and holding secret talks with Alenia Aermacchi, ostensibly following orders to do so.
In the past 18 months, former Italian Prime Minister Silvio Berlusconi made every effort to persuade Prime Minister Benjamin Netanyahu to prefer the M-346. KAI suspects that someone in Israel capitulated to Berlusconi's pressure and ordered the Ministry of Defense to close a deal with Alenia Aermacchi in a side room in exchange for reciprocal procurements of two state-of-the-art IAI AWACS planes based on the G-550 Gulfstream platform. The Italian deal is estimated at $700-800 million.
The Ministry of Defense's vehement denials of a secret deal between Israel and Italy did not calm the Koreans. KAI executives threatened that if Israel fixes the deal in Italy's favor then South Korea could similarly retaliate by cancelling defense procurements in Israel, which are expected to reach $5 billion in the coming years.
This is neither muscle-flexing or mere appearances. South Korea has demonstrated that it is a serious customer of Israeli systems. It has already bought IAI's Green Pine warning radar system, a component of the Arrow anti-ballistic missile system which is in operational use in Israel, and has also procured the latest helmet mounted head-up-displays for pilots made by Elbit Systems and Elisra electronic systems.
When Israeli defense correspondents visited KAI's avionics laboratories at Busan, 280 kilometers south of the capital, Seoul, Zeev, a senior technician at an Israeli defense company, popped over to say shalom - demonstrating the tight defense ties between Israel and South Korea. Zeev has made seven trips to KAI to customize electronics systems for the T-50, which the Korean Air Force is procuring to replace its obsolete F-5s.
Zeev says that his Korean colleagues are worried about Israel's pending decision on the IAF's next jet trainer, because picking the M-346 will greatly reduce the chances of marketing the T-50 to other countries, including the US, Chile, and the United Arab Emirates, which are still deciding whether to procure the jet. The IAF's reputation opens doors worldwide, and it is sometimes enough for a sales rep to hint that Israel has bought their product to get deadlocked talks moving again.
The Koreans are worried that if they cannot get orders for the T-50, the jet's production line will weaken, leading to mass layoffs, and severely damaging KAI. Israeli defense companies will lose a market that is set to make massive procurements in the coming years, including state-of-the-art radars, unmanned aerial vehicles (UAV), electronic warfare systems, and missile interceptors such as Israel's Iron Dome and Magic Wand.
Zeev is unfamiliar with the M-346, but has only good things to say about the T-50. He says that it is a great platform for carrying a range of electronics systems. He also praised the work ethic of his Korean colleagues, and their diligence and determination to meeting timetables.
"They admire Israel," Zeev told "Globes", "They look at Israel's stature as a model, they see similarities between the two countries, which both face threats and constant confrontation."
Reciprocal procurements are on the agenda
If South Korea wins the IAF jet trainer deal, it will be the first time that Israel has procured a Far Eastern jet, which reflects that immense technological leap forward by Korea. Corporate giants like Samsung and Hyundai have already taught lessons to Japan's Toyota. Korean factories are the size of Israeli towns, and its shipyards build ships that are larger than entire Israeli ports.
South Korea is one of the world's top 20 economies, with a GDP per capita of $32,000, above the EU average. Koreans believe that Israel's Ministry of Defense is well aware of Italy's shaky economic conditions, and that it will likely take them into account when considering the risks and survivability of long-term reciprocal procurement contracts.
KAI VP sales Enes Park says that, as part of South Korea's future reciprocal procurements with Israel, KAI is prepared to go the extra mile for Israeli defense companies, with a more generous offer than the Italians. He hints that reciprocal procurements could top $1 billion.
"Lockheed Martin's involvement in the T-50 could help Israel in terms of financing part of the deal with US military aid," says Park. He also does not conceal criticism of Alenia Aermacchi, saying, "We were surprised that Italy made all kinds of offers and deals to Israel outside of the proper tender procedures, and by their odd attempts to influence the deal."
Park made a number of tempting offers to IAI CEO Yitzhak Nissan during a visit to Korea in 2010. They include the possibly of manufacturing the T-50 wings in Israel. KAI will soon submit to the Ministry of Defense a list of reciprocal procurements, and the Koreans are planning some surprises to improve KAI's chances in the race.
Meanwhile, the Ministry of Defense seems pleased that the Koreans and Italians are sweating and trying to improve their offers. Ministry officials were therefore happy to make a new demand: the trainer that will be chosen will be delivered as kits that will be assembled locally by IAI and Elbit Systems.
A common simulator
South Korea understands Israel's complex defense needs, and it knows that the IAF will have to respond to short and long-range combat scenarios. If necessary the T-50 trainer might have to undergo rapid conversion to combat operations against short-range targets in Gaza, Lebanon, or Syria.
Next to the T-50 flight simulator at the Korean Air Force's flight school is a pilot who says that 120 pilots train on the T-50 annually. He says that the plane's low speed makes it a classic trainer, cutting combat training time by 30% and training costs by 25%. KAI is already developing the next-generation T-50 simulator to train on the attack version of the plane. KAI recently signed an agreement in principle with Elbit Systems to jointly develop the simulator - on the condition that Israel buys the T-50.
Defense Ministry complains of illegitimate pressure
Top Ministry of Defense officials reject South Korea's claims, and say that no decision has been made about the new trainer. The ministry opted not to respond to KAI claims, but said that this was an illegitimate campaign by a company and interested party to influence the procurement process.
The Ministry of Defense considers KAI's invitation to Israeli correspondents, including from "Globes", to visit its facilities and factories as part of this campaign.
In response to KAI's contentions, Ministry of Defense PR director Shlomi Am Shalom said, "The claims are baseless and have no grounding in reality. Moreover, we wish to point out that for a correspondent who went at a fully paid-for invitation by a commercial company that is a party in the selection process of the plane, to ask questions representing the interests of one side to be mendacious. We have no intention of discussing the matter in the media. That is not our way."
The correspondent was a guest of KAI
Published by Globes [online], Israel business news - www.globes-online.com - on December 1, 2011
© Copyright of Globes Publisher Itonut (1983) Ltd. 2011