Small defense cos face tough times

Small and medium defense manufacturers saw exports fall last year and IDF cutbacks aren't helping.

Israel's defense exports reached an all-time high of $7.5 billion in 2012, reported Ministry of Defense SIBAT - Defense Export and Defense Cooperation earlier this year. The fantastic performance, which puts Israel among the world's top armaments powers, is led by large companies Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1), Israel Military Industries Ltd. (IMI), and Rafael Advanced Defense Systems Ltd. However, small and mid-sized defense companies saw worrying signs of stagnation last year: their aggregate exports fell to $500 million in 2012 from $651 million 2011 and $652 million in 2010.

The Ministry of Defense attributes the drop in exports by small and mid-sized defense companies to increasing pressure in the global defense market. Like in Israel, defense budgets in many countries are shrinking, and many bidders jump on every tender. "Competition is fierce," a top defense source told "Globes". "In these hard times, it is very hard for small and mid-sized companies to get deals. The market is complicated and nothing should be taken for granted."

According to SIBAT, Israel has 600 small and mid-sized defense companies. Many of them survive on orders from the Ministry of Defense, such as manufacturers of components, which are subcontractors of the big companies for the Merkava tank and other programs. The large budget cut expected in the 2014 defense budget will affect all defense companies, and hundreds of small and mid-sized companies will be the first to get hit: the closing of a project will be a body blow for a large defense company with billions of shekels in exports; for a small company that supplies critical components for that project, it's a death sentence.

With this tough economic reality having no end in sight, SIBAT believes that the only card could keep these companies in the game is increased involvement in the global market. Currently taking place in Washington DC is the (AUSA) 2013 Annual Meeting and Exposition, which opened on Monday at the Walter E. Washington Convention Center. SIBAT representatives are accompanying ten small and medium sized companies that are trying to promote developments and systems to meet the needs of world customers. At the same time there is a permanent exhibition in Israel where these companies present their wares to overseas procurement delegations.

The Ministry of Defense believes that this new exhibition, which opened last week in Tzrifin near Rishon Lezion, will be a major focus of attention for the more than 200 defense delegations that visit Israel annually in search of weapons systems.

SIBAT deputy director and head of defense inventory marketing and sales Itamar Graff said, "The official delegations that come to Israel as SIBAT's guests prefer to visit the large defense companies and have tight schedules. They cannot visit every small and medium sized company. The aim of the new exhibition pavilion is to bring together for every delegation a presentation of all the systems and means that interest them, all brought together under one roof."

The first delegation to dedicate the new exhibition came from India and were presented with the developments and systems of G-Nius, Beth El, Innocon Ltd.,, Orbit Technologies Ltd. (TASE:ORBI) and more.

One of the delegations was from FICCI, the Indian organization that brings together private and government defense companies, many of whom have great interest in cooperation agreements with counterpart Israeli companies.

Graff said, "We are in favor of such ties and it was easy to expose a large number of companies to members of the delegation, all under one roof. Our aim is to bring there each week at least one delegation and expose as many companies as possible to the maximum number of markets."

Biting nails

While senior staff at the Ministry of Defense are skirmishing with their colleagues at the Ministry of Finance on the size of the defense budget cut for 2014, heads of defense companies are sitting and biting their nails. The Ministry of Finance wants the 2014 defense budget to total "just" NIS 51 billion. From the defense establishment's point of view this does not leave very much room for maneuver in strengthening and equipment.

Everyone will pay the price. Projects of major security importance will be in danger of shutting down or being postponed, contracts already signed between the defense establishment and defense companies might be reopened, with payments spread over longer periods.

"We have a tough winter in front of us," said a senior executive at a large defense manufacturer, "and at the moment there is tension and uncertainty over what lies ahead."

Senior executives in the sector say that a major cut in the defense budget could cause a chain reaction influencing the entire economy and resulting in thousands of layoffs. Such damage, there are concerns in the industry, would take defense manufacturers many long years to recover from.

Industry sources add that it is pure fantasy to expect that Israeli companies will be able to continuing selling abroad $7.5 billion in weapons systems annually after the IDF cut backs.

Published by Globes [online], Israel business news - - on October 23, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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